If there’s one lesson we can learn from lobbyists in Washington it’s that when you don’t like the results of the game it’s time to change the rules.
That’s essentially what’s begun to happen in real estate. The housing market has simply never recovered from the mortgage meltdown, indeed home prices today remain lower than their 2007 peak despite mortgage rates well below 4 percent. Existing home sales in 2014 were actually lower than in 2013 despite claims of falling unemployment and improving economics.
One explanation for the current lack of existing home sales is an inventory shortage.
“Sales of existing homes in the United States fell sharply in January, to their lowest in nine months, amid a shortage of properties on the market, a setback that could temper expectations for an acceleration in housing activity this year,” reported the New York Times when trying to explain the lowest existing home sales in seven months.
According to the National Association of Realtors inventory levels in January rose when compared with December, indeed some 1.87 million homes were available for purchase. If inventory levels were up and unit sales were down, then aren’t relative more homes available to potential purchasers?
“January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows,” said NAR chief economist Lawrence Yun.
This too is an odd claim. Are there not seasonal influences every January? Is snow in the usual places a surprise? Is it unexpected?
As to rising home prices, NAR reports that “the median existing-home price for all housing types in January was $199,600, which is 6.2 percent above January 2014. This marks the 35th consecutive month of year-over-year price gains.”
If rising home prices are slowing demand then should we hope for lower prices this year to stimulate sales?
Home Sales And Changing The Real Estate Market
In fact, whether by design or coincidence a number of changes are underway which should result in both more home sales and higher prices.
First, we have Fannie Mae and Freddie Mac. They used to require 5 percent up-front but under orders from their federal regulators are now willing to purchase mortgages with as little as 3 percent down from first-time home buyers. This new — and lower — standard is designed to overcome our flagging ability to save: The savings rate was 15 percent in 1975 but less than a third of that last year.
Second, the FHA has reduced its annual mortgage insurance premium (MIP) for most borrowers from 1.35 percent to .85 percent. That’s a half-percent drop, a big savings for many potential borrowers.
“This action,” said HUD, “is projected to save more than two million FHA homeowners an average of $900 annually and spur 250,000 new homebuyers to purchase their first home over the next three years.”
In rough terms, if HUD is right, 2015 home sales could increase by about 5 percent.
Third, we have interest rates which are likely to go nowhere. Freddie Mac, as one example, has just lowered its interest-rate forecast for the year from 4.2 percent to 3.9 percent for 30-year fixed-rate mortgages.
“Even if the Federal Reserve begins raising short-term rates later this year, don’t expect to see long-term rates — including mortgage rates — increase much,” said Len Kiefer, Freddie Mac’s deputy chief economist. “This is great news for housing markets, especially headed into the spring home buying season. Lower rates help to offset some of the recent increases in house prices and keep homebuyer affordability high.”
Fourth, the Federal Reserve has not been able to boost rates. Rate watchers will remember that mere rumors that the Fed would end its quantitative easing program forced rates up last year — until they fell back down. And when the Fed actually ended its monthly securities purchases in 2014 the result was that nothing happened, indeed interest rates actually fell at year-end.
Economists at the Urban Institute make the argument that interest rates are likely to remain in a ditch this year — and for some time well into the future. It says five factors are holding down rates and those trends are unlikely to quickly change. Those trends include such things as troubled oil markets (which will drive money into Treasuries), turmoil abroad and reduced mortgage demand.
A New Look At Wages
Meanwhile, outside of real estate, there’s one trend which could change the housing market, especially among first-time buyers, the growing demand for higher wages. WalMart has just announced that it will institute a wage increase for its army of employees, bringing them to at least $9 per hour this year and $10 next year.
The reason to treat workers well is that it’s ultimately profitable. It’s expensive to have employee vacancies and it’s costly to constantly re-train new people. In addition, workers who earn an “efficiency wage” are arguably happier with their jobs, more productive and do better work. As examples look at Zingerman’s in Ann Arbor, Whole Foods, Moo Cluck Moo in Michigan ($12 an hour, minimum), In-and-Out Burger in California ($10.50), and Boloco Burrito ($9).
Ultimately, it’s higher wages and more household income which will make real estate ownership more interesting, otherwise there’s little opportunity to take advantage of lower down payments, reduced insurance costs or modest home valuations. The good news is that better wages are likely to be the one change which will become more common as the economy comes back.