It was nice while it lasted — but will it last longer?
Housing during the past year has been hot. The National Association of Realtors reports that July existing home prices were 13.7 percent higher than a year ago.
One reason home prices are up is that foreclosures are down. RealtyTrac reports that as of August foreclosure levels were down for the 35th month in a row — this is important and here's why: Foreclosures sell at discount so when even a few distressed homes show up in recent comps they can materially push down community home values. In turn, one reason for higher home prices is that there are simply fewer distressed and discounted properties in the sales mix.
Rising prices and fewer foreclosures are great news but can such trends continue?
The issue is not that interest rates are especially high — they are higher than in 2012 but then in 2012 we had the lowest interest rates in 65 years.
Nor is the problem that home prices have been rising — they remain lower than in 2007.
Instead, the emerging problem concerns the issue of affordability. Pricing and interest rates are rising at the same time, put them together and you get higher monthly ownership costs, less affordability and a smaller pool of potential buyers. That smaller number of buyers means less demand and therefor a slowing of price increases.
The affordability issue is made worse because incomes have been going down. Between 1999 and 2012, according to the Census Bureau, household incomes fell 8.9 percent.
Less income means there are fewer dollars to buy goods and services and thus invigorate the economy. Less income is also creating another problem: consumer confidence. According to the latest confidence study from the University of Michigan and Thompson Reuters: “The fewest consumers in decades anticipated that their finances would improve during the year ahead. Moreover, consumers anticipated a slower pace of growth in the national economy, and unlike the more favorable employment prospects that they held over the past year, consumers now expect net increases in the national unemployment rate.”
One by-product of consumer uncertainty is that job numbers do not really reflect public preferences. With incomes going down how many people can seek raises or leave their current positions to seek higher wages? No less important, the nature of the workplace has changed. Some employers offer part time jobs but with the requirement that employees be available on a flexible schedule. That may work for one employer but it effectively prevents the employee from holding two part-time jobs.
“Scheduling practices at major retail employers in New York City reflect nationwide trends toward the creation of a 'just-in-time' workforce," explains a 2012 report from the Retail Action Project. “Almost 60 percent of the retail workforce is hired as part-time, temporary or holiday, and only 17 percent of workers surveyed have a set schedule. The vast majority, seventy percent, only knows their schedules within a week.”
"While part-time is an attractive choice for some workers," said the report, "this explosive growth of part-timers is because of underemployment, not because of worker choice."
Looking toward the future, the UM confidence report also said: “Hopefully, economic sense will not remained sequestered, with a grand bargain allowing all sides to claim victory. If the plunge is soon reversed, consumer spending can be expected to grow by1.8 percent in 2013; if not, spending growth could be considerably slower.”
Unfortunately the federal sequester — something neither political party wanted or expected — continues and with it a crushing of consumer confidence.
It should be said that rapidly rising home prices do not necessarily inspire great confidence. Just as we have seen with the stock market, increasing prices have raised new “bubble” worries.
Last week CNBC’s John Carney wrote that "we got the fourth month of home affordability data coming in below trend, which is a strong confirmation that the housing market is once again in a bubble."
We don't know that there is a bubble or will be one. The price increases seen during the past year are not sustainable without parallel increases in household income. A slower — and more logical — pricing scenario would be one where home values return to modest growth rates, say 1 percent or 2 percent above the annual rate of inflation.
Even with income lagging, confidence softening and the sequester continuing not all the news is sobering: If fears about real estate ownership motivate people to rent, that's good news for investors in the ongoing search for higher rents and fewer vacancies.
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