Real estate predictions for the coming year suggest both increased sales and higher prices, but will that be the case?
According to the National Association of Realtors 2015 should see home sales grow from 4.9 million units to 5.3 million, a nice increase. As well, the Realtors predict that real estate values will increase 4 percent, about twice the current rate of inflation. If correct, that would mean more equity and increased buying power for millions of homeowners.
“Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery,” adds David Crowe, chief economist with the National Association of Home Builders.
The alternative view works like this: Despite remarkably-low interest levels existing home sales in 2014 fell. Worse, sales to first-time buyers are at their lowest levels in nearly three decades, meaning that existing owners cannot move-up or move out without replacement owners to take their place.
The central problem is not interest rates (around 4 percent at year end) or home prices (still 19 percent below August 2006 when values were at their peak, according to RealtyTrac. Instead, the issue is affordability.
Name one thing today which is cheaper than in 1999 and then consider this reality: Household incomes today are lower than 15 years ago, according to the U.S. Census Bureau.
How can we have more home sales in 2015 while at the same time household incomes are in a financial ditch?
The solution — at least for the moment — is two-fold:
First, we have lower mortgage rates. You can get 4 percent, 30-year fixed-rate financing at this time versus 7.44 percent in 1999. The difference is huge: Borrow $200,000 today at 4 percent and the monthly cost for principal and interest is $954.83 versus $1,390.22 at 7.44 percent. That’s an annual savings of $5,225.
Second, with lower home prices we have less mortgage debt. In 2009, total U.S. mortgage debt stood at $10.4 trillion versus $9.375 billion in mid-2014.
Combine lower rates with less debt and affordability levels should soar but they’re offset in many markets because of high local costs.
RealtyTrac has found major 98 counties where affordability is falling and buyers are being frozen out of the marketplace, areas with a combined population of nearly 62 million people. The counties with falling affordability include Los Angeles County, Calif., Harris County, Texas in the Houston metro area, Orange County, Calif., in the Los Angeles metro area, Kings County (Brooklyn), N.Y., Dallas County, Texas, Bexar County, Texas in the San Antonio metro area, Alameda County, Calif., in the San Francisco metro area, Middlesex County, Mass., in the Boston metro area, Oakland County, Mich., in the Detroit metro area and Travis County, Texas, in the Austin metro area.
Of the 475 counties reviewed, “one in five markets have now exceeded their historical affordability norms, which is a strong sign that either a new home price bubble is forming in those markets or that home price appreciation will soon plateau until incomes can catch up,” said Daren Blomquist, vice president at RealtyTrac.
The Employment Illusion
According to government figures, the country added 314,000 jobs in November, the best result since the 1990s. The White House adds that “the private sector has added 10.9 million jobs over 57 straight months of job growth, extending the longest streak on record.”
That sounds great but the White House also said this: “The average workweek in the private sector rose to 34.6 hours in November, the highest since 2008.”
It’s surely good that we have more people working, but the definition of a “job” is plainly not 40 hours. If people are not working full-time they can’t maximize their income, get to the promised land of overtime for hourly work or afford a mortgage in many markets.
There were 6.9 million who were “employed part time for economic reasons,” said the Bureau of Labor Statistics. “These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.”
Non-farm workers had an average income of $24.66 per hour. For a 40-hour workweek that’s $986. With a 34.6 hour workweek wages fall to $853 or $44,356 per year. According to the Census Bureau, the median household income in 2013 — the income for a “household” not just a single worker — was $51,939.
Despite puffed-up job claims the bottom-line is that a lot of people don’t have the income necessary to comfortably make a long-term homeownership commitment. Worse, for a growing number of non-owners, the possibility of ownership is slipping away.
“If a renter hasn’t owned a home by age 45, then chances are they will continue to rent throughout their lifetime,” says a new study from Freddie Mac.
Major Markets Off-Limits
A December market research report from Deutsche Bank by Ying Shen and Richard Mele says “we expect about half of 25 large markets to be unaffordable in the next three years for the median income home buyer.”
The catch is that the lack of affordability could grow substantially if mortgage rates increase. Even without any price rises, the researchers expect that a 1-percent interest increase would make 21 of the 25 largest markets unaffordable for the median income home buyer, meaning huge numbers of us.
If affordability forces out the poor and the middle class from major metro areas then who drives the ambulances, teaches the children, fixes the plumbing or paves the roads? As John Kennedy said at his inauguration, “if a free society cannot help the many who are poor, it cannot save the few who are rich.”
If we leave the cozy and comfy world of today’s ultra-low mortgage rates, if home values increase, or both, then the affordability picture becomes even darker. This brings us to a looming problem, a deliberate effort to raise interest rates.
The effective Fed funds rate is currently at .09 percent but Standard & Poor’s says its “economists now expect a rate hike in second-quarter 2015 and see the Fed funds rate reaching 1.25 percent by year-end 2015, which will slowly climbing until it reaches the so-called ‘exit rate’ of 3.75 percent by third-quarter 2017. Still, we also believe the problems — or successes — in other economies will factor into the Fed’s policy decisions. Indeed, with the Eurozone struggling and facing the threat of falling back into recession, the possibility that U.S. central bankers will wait longer to raise rates remains on the table.”
The company adds that “it has been 10 long years since the Fed last embarked on a rate hike cycle, so standing finally on the threshold of another one has banks keenly focused on the variety of impacts higher rates are likely to have on them. Will significant amounts of deposits, particularly noninterest-bearing deposits, move away from banks to places that offer higher yields? And what if the Fed doesn’t raise rates after all in 2015?”
An alternative question is this: Will so much cash flood the US financial system that rates can’t rise? This is a very real possibility given economic slowdowns in Europe, Japan and Asia as well as the fall of oil prices worldwide plus open warfare and civil unrest in large swaths of the Middle East.
A Nation of Renters?
If ownership is unaffordable then the alternatives are renting and multi-generational housing. Both options mean less ownership and less ownership means less wealth.
“Renting,” says The New York Times, “can make sense as a lifestyle choice or because of income constraints. As a means to building wealth, however, there is no practical substitute for homeownership.”
“Since the housing bust,” said the paper in a recent editorial, “renting has been in and owning a home has been out, especially among young adults who in earlier decades would have been first-time home buyers. As the rate of homeownership has declined, from a peak of nearly 70 percent in 2004 to a 20-year low of 64.3 percent recently, the number of owner-occupied homes has barely budged, while the number occupied by renters has increased by nearly 25 percent.”
We need more and better jobs so people can afford homes even if real estate values increase and mortgage rates rise. Today’s employment numbers mask the realities of a fragile economy, one that for millions of people is not generating the hours and wages needed to justify the quest for real estate ownership. Without a stronger job base the housing sector simply can’t move forward on a sustained basis.