Can a housing market rally by sustained with fewer homeowners?
Historically, in housing markets that displayed robust price increases, the rally was driven by increasing employment and rising wages. This has long been considered a fundamental of all housing price movements. The logic behind this is simple. New jobs need to new household formation which puts greater demands on the available housing stock. Further, rising wages allows these new buyers to bid more for the supply available pushing prices higher. But what happens to a market where home ownership rates are declining? Is it really possible to have a sustained rally in house prices when the traditional fundamentals are absent?
by Jann Swanson — May 13 2013, 10:35AM
In its April Housing Data Wrap-Up Wells Fargo’s economists summarize the nation’s housing picture: “While most of the housing-related headline numbers continue to improve, the underlying details give us some pause.”
The housing headlines are dominated by a chorus of financial reporters who specialize in telling people what they want to hear. The Pollyanna’s have ignored all the underlying problems with the housing market in their quest for ever more bullish headlines.
One headline, the surprising spurt in housing starts in March. A 1.04 million unit annualized rate marked the highest pace since June 2008. Rising above one-million units was a significant milestone, however the increase was totally in the multi-family sector, and single-family starts fell 4.8 percent.
The continued increase in multi-family housing is troubling. The federal reserve is inflating a bubble in the apartment market.
Another headline is rising prices and tightening inventories. The most recent figures from both S&P Case-Shiller and the National Association of Realtors reflect around 10 percent annual appreciation and as a consequence the percentage of homeowners with negative equity has declined. But much of the impetus behind the rising prices and shrinking inventories, especially in troubled markets like Atlanta and Miami, are sales to investors and cash purchases. Rising prices have outstripped appraisals in some markets, making it tougher for buyers needing a mortgage to buy a home.
The increased demand is not the real story. Demand overall is only up slightly. The real issue is the 50% reduction in inventory causing the demand to be concentrated on fewer properties. If the market were not being manipulated by the banks, the rising demand would be met with increased liquidations of distressed properties.
Wells Fargo points to other recent causes for concern. One is the recent slide in the Builders Index, a reflection of homebuilders’ perceptions of the new home market. After climbing into near positive territory for the first time in six or seven years in early 2013, it has slipped five points over the last three months.
Builders in Southern California are doing well because the inventory restriction is more severe here. In other parts of the country, new home sales are mixed, and builders are not able to push prices higher.
Mortgage originations for home purchases are also flat.
I’ve pointed out the lack of movement in loan originations over and over again. This is the real indicator of the future health of the housing market. Mortgage originations are both low and flatlined. This is a very bad combination. The number of new home starts is low, but at least people can point to improvement. With mortgage originations, there is nothing positive for the bulls to grasp onto.
The Bank says another disconcerting signal comes from the growing divergence between the homeownership rate and the recent spike in prices. Rising home prices usually coincide with rising demand as more households form or people’s preferences swing toward homeownership. The Banks says neither trend appears to be present today. Household formation rose 980,000 in 2012, compared to the long term annual average of 1.28 million between 1965 and 2001.
Household formation fell off a cliff during the recession. Many people doubled up, and many young people moved back in with their parents. realtors like to point to this as pent-up demand, which is nonssense, but this potential demand will remain pent up as long as unemployment remains high.
Moreover, the overwhelming majority of new households are choosing to rent rather than own their home. The homeownership rate fell 0.4 percentage points during the first quarter to 65.0 percent and is now at levels last seen in the mid-1990s.
That is perhaps the most troubling sign of all. Some of the preference toward home ownership may not be by choice. Many potential homebuyers may not have the credit, the income, nor the savings to buy. And those barriers cannot be overcome with financial innovation.
If new households chose rental over ownership, there simply won’t be enough demand from owner occupants to sustain pricing. Perhaps banks will kick-the-can and allow squatting indefinitely? It’s the only solution when the demand simply isn’t there.
The report points out, “It is hard to imagine a sustainable housing recovery taking place with fewer homeowners.” This point, it says, “appears to be lost in all of the celebration over soaring home prices and bidding wars for the scarce inventory of homes currently available for sale.“
It is certainly a point that is lost in the mainstream media.
It is important to balance enthusiasm over soaring prices with the knowledge that most of the housing market is still healing and the sharp increases in prices driven partially by both individual and investor purchasing. In contrast to prices, home sales are following a more modest trajectory, one in line with mortgage purchase applications.
That’s not entirely true. Home sales are up slightly, but its entirely due to the activity of investors. Mortgage applications are flat reflecting no increase in demand at all from owner occupants.
One point which tends to be overlooked, the report says, is that a full-fledged housing recovery will require a normally functioning mortgage market and we are nowhere close to one. The Federal Reserve is buying $40 billion in mortgage securities every month, the futures of Freddie Mac and Fannie Mae are uncertain and there are questions related to employment and job creation which have potential ramifications for homeownership.
Reporters rarely mention that the reason buyers can bid more for property is due to record low interest rates and unprecedented federal reserve stimulus to housing.
Is supply restriction the answer to all problems in housing?
Last week I wrote that The housing bears are rightfully frustrated. Without continued stimulus and policy manipulation, conditions in the housing market would not favor rising prices or new construction. The demand simply isn’t there. However, with supply manipulation rivaling the success of OPEC in the 1970s, lenders have created “house lines” where people camp out for the opportunity to overbid each other on what’s become an artificially created shortage.
If any of you remember the 1970s, you remember how much OPEC was hated for the inconvenience and the economic recession their supply restriction created. Most people today don’t recognize that lenders have engineered the same type of artificial shortage for the same self-serving reasons. If they did, perhaps people would be angrier at what the banks are doing. Banks have earned the scorn they receive.