Apr252017

Existing home sales are still below normal

Back in 2013, I predicted that existing home sales would remain low for the foreseeable future. That prediction proved to be correct, however, if you are interested on buying a home you can check with homes for sale barton the different options available.

By 2013 it was clear that the banks were avoiding or delaying foreclosure or short sale until prices rose high enough for them to avoid losing money on the sale. They had no choice. When the banks were exposed to $1 trillion in unsecured mortgage debt, they simply couldn’t take the losses.

Clearly, no matter what else happened in the market, lenders kicked the can with loan modifications and suspend homes in cloud inventory for as long as necessary. As I noted back in 2013, since problems in the market can’t be resolved by lowering price, the inevitable problems that arise will cause sales volumes to remain weak. As a result, you can expect years of low sales volumes in residential real estate.

After making that prediction, 2014 turned out to have lower sales volumes than 2013, and 2015 only returned to 2013 levels. In both instances, the market underperformed expectations, and economists were at a loss to explain it.

The fantasy among banks and policy makers was that a resurgent economy would bring back first-time homebuyers in large numbers who would reignite the move-up market and allow lenders to clear out their cloud inventory while sustaining modest rates of appreciation. Most economists actually believed that would happen.

I predicted that the reality would fall short in many significant ways. And when reality was different from the fantasy, clueless economists would act surprised and lament the “unexpected” results. They did.

One of the major hurdles facing a sustained rally in real estate prices was (and still is) the relative absence of first-time homebuyers, the bedrock of the market. First-time homebuyer participation was near historic lows.

Banks did a remarkable job of restricting inventory to push up prices, but if market prices are so high that first-time homebuyers can’t afford them, sales volumes suffer. Some first-time homebuyers held their noses and substituted down to lower quality properties, but many simply didn’t buy and chose to rent instead. The result was fewer transactions and low sales volumes.

Potential first-time homebuyers are under-employed, over-indebted, and unenthusiastic

There are three reasons we didn’t (and still don’t) see many first-time homebuyers. For one, many are under-employed. People with low-paying jobs don’t buy homes (anymore). Further, many potential first-time homebuyers have too much debt. They have large student loan payments, excessive credit card debt, and the lease their cars. They don’t have any money left over to save for a down payment. And even if they had the savings, they don’t have the qualifying back-end debt service ratio required to get a loan.

In the new mortgage regulations, back-end debt-to-income ratios were capped at 43% for all qualified mortgages. If the borrower wants to max-out their loan with a 31% front-end ratio, they can’t spend more than 12% of their gross income on student loans, credit cards and car leases combined. Many young people spend that much on each of those. Any potential homebuyer with a student loan and a car payment — which is most of them — is unable to qualify for a loan. And that’s a good thing because if they got a loan, they couldn’t afford the payments anyway.

And finally, after witnessing the catastrophic collapse of home prices that trapped the preceding generation in their starter homes, many potential young buyers simply don’t want to take the risk. Perhaps rising prices and endless NAr bullshit will force kool aid down the gullet of this generation, but many will learn the hard lessons of the housing bubble and refuse to overpay for a house.

Remember 2007

Everyone laments the lack of MLS inventory, but even if we had an explosion of high-priced inventory, it wouldn’t change much. Inventory that’s priced above what people can afford is the same as inventory that isn’t there. Back in 2007, we had an explosion of inventory, yet sales dropped precipitously.

Many observers mistakenly believe the influx of inventory in 2007 pushed prices down. That isn’t the case. In 2007 the normal listings that came to market found no buyers. Prices fell steeply in 2008 despite declining inventory for most of the year. Transaction volumes dried up in 2007 because the toxic financing was taken off the market and people couldn’t finance the large sums necessary to pay peak prices (see red line below).

Since 2007, mortgage interest rates fell from 6.5% to 3.5% thus allowing buyers to finance mortgage balances similar to those during the housing bubble.

Price or volume but not both

realtors want to see high transaction volumes because that maximizes commission revenue. Banks and over-indebted homeowners want to see high prices so neither party loses money. Unfortunately, it’s nearly impossible to enjoy high prices and high volume, at least in a world without toxic mortgage affordability products.

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