By now the housing market was supposed to be booming. Combine a growing population, low mortgage rates, years of pent-up demand, fewer foreclosures, lower unemployment plus a generally-better economy and the stage should be set for a very nice real estate lift-off.
It hasn’t happened — and the result may be very good news for buyers and investors.
“After a decade of boom-bust-boom,” explains Bloomberg Businessweek “the U.S. housing market is going downhill just when many economists thought it would be heading higher.”
“Some growth was inevitable after sub-par housing activity in the first quarter,” said Lawrence Yun, chief economist with the National Association of Realtors “but improved inventory is expanding choices and sales should generally trend upward from this point. Annual home sales, however, due to a sluggish first quarter, will likely be lower than last year.”
Here’s another term for “improved inventory.” It’s called “more unsold homes.” There’s now a 5.9-month supply of homes for sale versus 5.2 months a year ago and total existing home sales for 2014 are expected to be lower than last year.
With so many bright signs in the marketplace why have home sales stalled? Let’s look at five possible reasons.
First, we’re not as cuddly as we used to be. Household formations are down.
“Over five years during and after the 2007–09 recession, the number of households established in America plummeted by about 800,000 a year from the previous seven years,” according to the Federal Reserve Bank of Atlanta. In other words, four million additional household have not formed, a huge problem because new households have traditionally been a major source of first-time buyers. Imagine how different the real estate picture would be if household formations were at normal levels and we had an additional 200,000 sales per year.
Second, fewer of us are entering the real estate marketplace.
According to NAR, first-time buyers represented 29 percent of the market in April. That sounds like a lot but traditionally first-timers make-up about 40 percent of all buyers.
The lack of first-time buyers breaks an essential link in the usual chain of real estate sales. First-time buyers typically purchase entry-priced homes. The sellers of such properties can then move-up to bigger-and-better homes. In turn, the owners of bigger-and-better homes can then move-up to even larger and more wondrous properties but without the usual level of first-time purchasers a lot of entry-level homes take longer to sell or never come to market. The result is fewer move-up buyers and a weaker overall marketplace.
Third, the impact of the foreclosure meltdown is not over.
“Contrary to the claims of many observers that the recent rise in housing prices is solving the nation’s foreclosure and related economic crises, millions of families continue to face financial devastation from which many may never recover,” says a new report from the Haas Institute for a Fair and Inclusive Society at U.C. Berkeley. Entitled “Underwater America,” the report also explains that the financial sting from millions of foreclosures has not been equally shared.
“For African Americans and Latinos specifically, between 2005 and 2009, they experienced a decline in household wealth of 52 percent and 66 percent, respectively, compared to 16 percent for whites,” according to the study.
Fourth, lower mortgage rates have not helped sales.
The usual understanding is that lower mortgage rates are the surest path to more home sales. Drop mortgage rates, affordability soars and it becomes easier to qualify for a loan at every income level.
There’s no doubt that mortgage rates are soft and mushy. They’re not down to the historic lows seen in 2012 but they’re not far off. The result has been a huge rush to refinance during the past two years, good news for borrowers but perhaps not so good for real estate sales.
With mortgages locked-in at low rates through refinancing many borrowers are loathe to move and get a new loan at today’s relatively “higher” mortgage levels, rates that are higher than in 2012 and early 2013 but rates which are also ridiculously low by historic standards.
In a sense, the historic low rates may well have created a large number of “captive borrowers,” individuals who now have a huge hedge against inflation in the form of long-term fixed rates and not much incentive to give up their current financing.
Fifth, new home builders have missed the mark.
With household incomes down it follows that a lot of would-be buyers are not looking for “starter mansions” and yet builders continue to churn out massive homes with big price tags.
“The average home size has continued to rise for the past four years, from 2,362 square feet in 2009 to 2,679 square feet in 2013,” said Rose Quint, assistant vice president for survey research with the National Association of Home Builders.
More interior acreage equals higher costs: The typical existing home sold for $201,700 in April, according to NAR while the home builders explain that “as homes get bigger, so does the average sales price, rising from $248,000 in 2009 to $318,000 in 2013.”
In a news release, NAHB reports that “sales of newly built, single-family homes rose 6.4 percent to a seasonally adjusted annual rate of 433,000 units in April, according to newly released data from HUD and the U.S. Census Bureau. The gain builds on an upward revision of sales numbers reported for the previous month.”
Sounds great. Oh, wait, here’s what else HUD and the Census Bureau said: April new home sales were 4.2 percent lower than a year ago.
The Bottom Line: Foreclosures and short sales remain in good supply, mortgage rates are low and because a lot of people are not buying prices nationwide are soft, vacancies are generally down and rents are generally up. That’s about as good a formula for buyer success as can be had.