Real Estate And The New Normal

There has been quite a fuss during the past few days as a result of the announcement by Freddie Mac chief economist Frank Nothaft that “we are getting closer to a more normalized economy.”

If it’s true that we’re nearing a “more normalized economy” then it might be helpful to know exactly what “normal” is. As an example, during the past 40 years mortgage rates averaged 8.6 percent, according to Standard & Poors. Given that interest rates as of this writing are at 4.12 percent — the lowest level in  2014 and less than half the 40-year average — how can it be said that mortgage rates are nearly normal or remotely headed in that direction?

Okay, what about new home sales?

The population between 2000 and 2013 increased from 282.2 million to 317.3 million. That’s an additional 35.1 million people, an impressive number and one might think that new home sales would grow as a result but that isn’t the case — there were 880,000 new home sales in 2000 and a meager 430,000 in 2013, according to the Federal Reserve Bank of St. Louis.

Where Are The Jobs?
What about employment?

Anybody see normalization? Freddie Mac says that “after several years of weakness we are starting to see the labor market pick up steam having added 230,000 net new jobs on average for the first seven months of this year.”

If you believe that a “job” is something which involves at least 40 hours of employment per week and produces a living wage then that “230,000 net new jobs” may not be so impressive.

According to the Bureau of Labor Statistics “people are considered employed if they did any work at all for pay or profit during the survey reference week. This includes all part-time and temporary work, as well as regular full-time, year-round employment.”

The BLS definition of a “job” is so expansive that it might not even mean a paycheck because it actually includes “unpaid family workers.”

Where Are The Households?
The lack of meaningful jobs is the major reason that huge numbers of young adults continue to live with their parents.

Freddie Mac says “the number of persons per household has increased by 2.6 percent since 2005, going from 2.69 to 2.76 persons per household. If the persons per household had held steady over that period there would be an additional three million households today.”

But there aren’t an additional three million households today and the reason is clear: According to Pew Research, “a record 57 million Americans, or 18.1 percent of the population of the United States, lived in multi-generational family households in 2012, double the number who lived in such households in 1980 because so many real jobs are lacking millions of millennials continue to live with their parents.”

Where’s The Money?
It should be a lot easier to buy a home today than in the recent past. The government says home prices in May were 6.5 percent below their 2007 peak, according to the Federal Housing Finance Agency. So — logically — if home prices remain weak and interest rates are less than half the level seen during the past 40 years then shouldn’t home sales be exploding?

That turns out not to be the case.

According to the National Association of Realtors, existing home sales were actually lower than a year ago. Not only that, home prices are actually falling in a large number of areas — NAR says home values rose in 122 metro areas while at the same time prices dropped in 47.

We’re becoming a nation divided by housing values and there’s nothing normal about that. “Americans,” says The New York  Times, “have never hesitated to pack up the U-Haul in search of the big time, a better job or just warmer weather. But these days, domestic migrants are increasingly driven by the quest for cheaper housing.”

But why the search for cheaper housing? Because there’s a growing mathematical impossibility, the idea that you can have both rising home values and falling paychecks at the same time. As the Census Bureau explains, household incomes declined 9 percent between 1999 and 2012.

The New Normal
According to the National Association of Home Builders, in August “markets in 56 of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity.”

It’s hard to imagine that this is the smoking gun, the irrefutable evidence that things are getting better. If 56 metro areas are returning to normality out of approximately 350 then isn’t it true that 294 markets — almost six times as many — are not back to normal?

In the end, the real estate issue which matters most is not houses, it’s jobs and income. While it would be great if Mr. Nothaft was correct and that “we are getting closer to a more normalized economy” the evidence suggests something else, that a “new normal” is here and for millions of Americans it’s not an era of milk and honey.

According to NAR, “the percent share of first-time buyers continues to underperform historically.” In June just 28 percent of all existing home buyers were first-timers, down from around the 40 percent or so that we used to see.

Without more first-time buyers coming into the marketplace it becomes difficult for homeowners to sell their properties and move up — or to sell at all. A  vigorous real estate market depends on a constant influx of first-timers, but how can buying appeal to this group when wages are down and prospects are iffy?


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