Almost all of the recent reports on the housing market have been disappointing:
• Price gains are slowing, signaling a slower market. Some price indices are now under 6% year-over-year, the lowest growth since 2012.
• New home sales continue to limp along. Sales year-to-date through September up only 2.4% year-over-year (yawn).
• Existing home sales (September) down 1.7% year-over-year, with inventory basically flat for the past 18 months.
• Housing starts (September) still a boring 1.017 million (Seasonally adjusted annual rate), with building permits very close to that level, up 2.5% year-over-year (more yawning). The latest 2015 forecasts are only in the 1.16 million range.
• Mortgage applications down 6.6% in a recent week (Mortgage Bankers Association), to the lowest level since February.
• The Housing Vacancy Report from the Census Bureau calculates the home ownership rate at 65.2%, the lowest since the 1960s.
• The National Association of Home Builder Index is at 54, still in positive territory but down five points from the previous month.
It is no surprise that housing has hit another soft spot. This economic recovery has featured a series of false starts that has confused economists and frustrated politicians. Most industries, including trucking and truck equipment, have already experienced this pattern. The housing industry, falling the most and hitting the bottom last, is subsequently the last industry to recover. Its growth has been painstakingly slow.
Due to the severity of the real estate crash, it will take years for the market to function normally. Right now the market is very dysfunctional because:
Buyers don’t want to buy
• Emotional reasons: There is still fear left over from the Great Recession. The massive layoffs meant either your job got whacked or you know somebody whose job got whacked. People without houses would rather rent than take on risk or debt. People with houses are not really interested in trading up to more expensive dwellings for the same reason. People are not moving long distances to take new jobs (and buy new homes) as they did in the past. People are still fearful of taking on more risk.
• Logical reasons: There is just not as much money available to spend on housing. Many people are making less money than before the Great Recession. If they lost their home, they don’t have enough money yet to buy another one. For many others, wages are stagnant which doesn’t encourage first-time buyers and doesn’t promote trading up. Finally, there are the Millennials who should be starting households, in (of course) houses, but are straddled with high student loan debt, low-wage jobs, or a no-wage existence.
• Cultural reasons: The Millennials are cohabitating in record numbers. While this may qualify statistically as a household, it does not immediately involve a long-term commitment. Because buying a house usually comes with a long-term commitment, known as a mortgage, cohabiters are much more likely to rent than buy.
To Baby Boomers, owning a house was a central part of the “American Dream.” Buying a house was an expected part of your lifestyle, and the size of your house a visual representation of your success. This idea has become less prevalent for each successive generation, and home ownership is much less important to Millennials.
Sellers Don’t Want To Sell
• Prices are still depressed. Many homeowners are still underwater, but this condition has improved significantly this year.
• There are risk factors in making a change and there is limited trading up activity as mentioned previously.
• People are not relocating much for new jobs.
Bankers Don’t Want To Lend
• Interest rates may be low, but requirements and standards remain very strict. If you qualify, you can eventually get a loan, but the process is reported to be onerous, frustrating, and lengthy.
Putting It Back Together
When a bubble bursts, it is messy. As messy as a huge egg falling off a wall. So call this the Humpty Dumpty housing market. It must be put back together again, but oh what a difficult job that is, much too difficult for all the King’s horses and men. Getting this market back to “normal” is going to take a long, long, time.