Aug282014
What if Millennials and boomerang home buyers never materialize?
Housing bulls continue incorrectly predicting the return of Millennials and boomerang buyers. It’s time to consider what happens if they never come back.
As home ownership rates plummeted with waves of foreclosures in the aftermath of the housing bubble, real estate pundits pinned hopes for a real estate recovery on the return of so-called boomerang buyers, people who lost homes to short sale and foreclosure who return to home ownership.
It’s a compelling fantasy. It envisions hard-working Americans diligently saving for a down payment and paying their bills to improve their credit score as they eagerly await their opportunity to buy a home again. Reality is less supportive of the bullish fantasy.
In the largest study ever conducted on boomerang buyers, the federal reserve concluded that less than 10% of borrowers who lose homes to short sale or foreclosure return to home ownership. Further, even the small subset who were never delinquent on a loan and paid off their mortgage, only 35% ever borrow money to buy a house again. Once people purge themselves of mortgage debt, few choose to take it on again.
This gets to one of the core problems of the boomerang buyer hypothesis; borrower reluctance. Many people may want to own a house again, but they aren’t willing to take on a huge mortgage to do it, particularly after they were so badly burned the first time — and these borrowers have good reason to be cautious because the entire housing market is heavily manipulated and not supported by strong fundamentals.
After losing their homes in the foreclosure crisis, boomerang buyers are back
By Michele Lerner August 21
Chris Noblejas, a former real estate agent, got hit by a double whammy during the housing crisis. His income declined drastically, and so did the value of the Gaithersburg, Md., townhouse he bought for $480,000 in 2006. He ended up selling the townhouse in a “short sale” in 2010 for $320,000. A short sale occurs when a lender agrees to accept a sales price for a home that is less than the amount owed on the property. …
“I wanted to buy a house again, but I was still nervous because I made such a bad mistake before,” Noblejas says.
That is buyer reluctance, and it’s very difficult to overcome.
In a recent post, Despite industry spin, mortgage lending standards are not tight, the staff of John Burns Real Estate Consulting urged industry activists to get out the word that credit is widely available, even to those who think they have bad credit. This report is part of that effort to get out the word.
“Even renting was hard when I first lost my house. I didn’t even know if I could buy again, but I talked to a loan officer and was able to qualify for an FHA [Federal Housing Administration] loan. I plan to refinance that loan into a conventional loan as soon as I can to get rid of the mortgage insurance payments.”
The FHA is the new subprime and the real estate industry wants to take advantage.
Boomerang buyers who lost a home to a foreclosure or short sale between 2007 and 2013 are projected to make about 10 percent of all U.S. home purchases in 2014, according to John Burns Real Estate Consulting (JBREC). … According to JBREC, the number of boomerang buyers will increase in 2015 and 2016 as more former owners become eligible for new loans.
This is wishful thinking. The huge study conducted by the federal reserve shows that only 10% ever return in their lifetimes. This demand cohort will never be 10% of the entire purchase demand in the housing market in one year. The dataset for their study is from the pre-housing bubble era, so for the sake of argument, let’s assume their data includes mostly deadbeats and that many of the foreclosures from the housing bubble are people who ordinarily would be diligent about paying debt. If that assumption is true, housing bubble borrowers who lost homes will return to the market at higher rates, but how much higher?
If you double the rate of return, then 20% will come back. How much higher can we reasonably expect the rate to be, particularly given the pain these borrowers endured when house prices collapsed?
Some housing market analysts, smitten with foolish optimism, projected as many as 80% of former owners may return to buy homes again, which isn’t going to happen.
“We always wanted to buy again, so we rented for a while and moved in with family for a year to save money,”Ashley Lawrence says. “We rebuilt our credit, and my husband got a good job in Virginia now, but we’ve moved every year since we lost our first house, which has been tough on our kids, who are now 7 and 4. ” …
This is the propaganda fantasy of the responsible, hard-working Americans returning to home ownership. Unfortunately, they represent 10% of those who lost their houses, not 50% or more as the housing bulls hope.
“Most buyers I work with now, especially if they lost a home in the past, don’t want to get in over their heads,” Harich says. …
This is buyer reluctance, and buyers shouldn’t blithely ignore the risks of buying a house.
Think about what the real estate industry is asking Millennials to do; Millennials just witnessed the generation before them get burned in the housing bust (43 percent of homeowners between 35 and 49 are underwater). Then they witnessed the rapid reflation of house prices that forces them to risk being underwater themselves in order to bail out the foolishness of the previous generation.
Should be really be surprised Millennials are reluctant to repeat the mistakes of the previous generation?
Most borrowers have learned that they need to be more careful about what they buy and to avoid overextending themselves, Cohen says.
LOL! No kidding!
They “want to build equity and want to make as big a down payment as they can,” Cohen says. “Even if it’s a 3.5 percent down payment on an FHA loan, that’s better than the old days of zero-down-payment loans. In this area, saving up 3.5 percent for a $300,000 home means you need at least $10,500, plus you need more for closing costs and cash reserves, so that represents a good effort to save for most people.”
Is saving 3.5% of a purchase price really that burdensome? If so, then Millennials and boomerang buyers may never come back to the housing market. What then?
What Happens if Millennials Never Enter the Housing Market?
By Kathryn Buschman Vasel, Money Tree, Published August 14, 2014
Millennials’ supposed lack of interest of becoming homeowners is often blamed for the market’s slowing recovery, but some experts say the generation shouldn’t shoulder all of the fault.
Anthony Hsieh, founder and CEO of mortgage company loanDepot, says lack of innovation and too tight regulations are draining the housing market’s revival.
He is wrong on both counts. First, financial innovation is a fallacy, and second, while new regulations on the mortgage industry are considered burdensome by industry insiders, these regulations are necessary to prevent the kind of foolish innovation that inflated the last housing bubble, and contrary to his spin, mortgage lending standards are not tight.
“Private capital is not back into the mortgage marketplaces, and this is seven years after the crisis,” he says. “Credit has not been widened or deepened, and there isn’t enough product innovation to offer loans to this generation. The only programs are still regulated very tightly by the government.”
Good. We should have a stable housing market with much less risk of another housing bubble.
He adds that the private mortgage market is currently $1 trillion, falling short of the $1.5-$2 trillion market in normal condition. “It’s too small of a marketplace to meet the needs of first-time buyers. In 2003, fresh mortgage originations was a $3.9 trillion market.”
This man is a fountain of spin and bullshit. Perhaps he should consult with the NAr? The mortgage market can easily meet the needs of first-time homebuyers. The reason the market is smaller today is because demand is lower today, partly due to higher home prices, and partly due to high unemployment and stagnant wages.
The millennial generation, which is bigger the baby boomer generation and is the biggest cohort of first-time buyers, has been largely absent in the housing market for various reasons: record student loan debt, high unemployment and underemployment, stagnant wages and a general disinterest of moving to the suburbs and taking on the responsibilities of homeownership.
“The big question mark is how long they put off entering the market,” says Keith Gumbinger, vice president of HSH.com. “If these first-timers don’t come in, that means the train can’t get underway. No one can sell and move up and on, the demand home prices rely on goes away….”
This is the long-term drag on the housing market everyone in the industry fears. For purposes of looking at the impact on the housing market, there is no difference between boomerang buyers and first-time homebuying Millennials; neither group is participating in the move-up market using equity from a previous sale.
I wrote in early 2013 that the move-up market would suffer for a decade. The combination of underwater borrowers whose equity flows back to the banks, and the absence of first time homebuyers (boomerang or Millennial) will paralyze the move-up market.
If Millennials and boomerang buyers never materialize, the lack of housing demand will prevent homebuilding from being the large economic force it once was, the home ownership rate will remain near the 64% average it sustained for 40 years prior to the temporary surge from subprime lending, and the home price appreciation that enriched the Baby Boomers will not materialize for subsequent generations.
[listing mls=”OC14099073″]
I recently wrote that single family rents were due to rise because the hedge funds stopped buying homes. But before rents can rise, the vacancy problems with the hedge funds needs to be resolved.
Vacancies drop again in Invitation Homes rental securitizations
he vacancy rate in the properties that make up Invitation Homes’ two REO-to-rental securitizations continued to decrease in July, according to a new report from Morningstar.
In Invitation Homes’ $1 billion single-family rental securitization, which launched earlier this year, the cash flow vacancy rate of the underlying properties fell to 5.4% as of July 31, down from June’s revised figure of 6.2%.
That securitization is backed by a single floating rate loan secured by mortgages on 6,473 single-family rental properties. Initial reports listed the total number of properties in the securitization as 6,537.
According to Morningstar’s data, the month-end vacancy rate, by property count, declined to 6.3% in July, down from the revised June figure of 6.6%.
Both figures are down sharply from May’s totals.
June’s figures saw the cash-flow vacancy decrease to 6.4%, down from a revised 6.8% as of May 31. By property count, month-end vacancy in June declined to 6.8%, also down from a restated 7.1% as of May 31.
And the vacancy rate is expected to continue its decline.
“With initial lease expirations peaking in May and June 2014 (23.3% of all properties in the pool had leases expiring through May 2014 and 34.3% through June 2014), Morningstar expects the month-end vacancy rate to continue to stabilize and to potentially decline further,” Morningstar said in its report.
Morningstar said that the net cash flow based on rents continues to be sufficient enough to cover the bond obligations.
I have been looking for a rental since my condo entered escrow and I see daily rents drops. It’s usually by only 50 dollars or so but it’s still surprising to me.
If you’re selling a local condo, that segment of the market is a little weakened by all the apartments coming on line, particularly the huge number of them in Irvine.
For a while, there was rental rate compression between apartments and single-family because no new apartments were being built as many SFRs became rentals. Now that trend is reversing as huge numbers of apartments are coming on line just as the influx of rental SFRs is drying up.
Even realtors are losing confidence in housing
The July 2014 Realtor Confidence Index shows that Realtors aren’t enthusiastic about current conditions and the outlook for the next six months.
Concerns about federal regulations burdening the process, the drop in demand for middle and lower-cost homes, and rising affordability problems headlined their concerns.
Realtors reported some uptick in inventory in some areas, but generally, supply remained tight relative to demand in many areas, especially for “lower” and “middle-priced” homes, according to the July survey conducted by the National Association of Realtors.
Distressed sales continued to account for a smaller share of the market.
Realtors continued to report about the restrictive effects of the current credit conditions, especially in relation to the credit score and down payment requirements that will qualify buyers for a mortgage.
The home buying process was reported to be “long and difficult” even for “quality borrowers”.
Although the home price recovery has encouraged more listings, the strong price growth amid modest wage income gains has also made homes less affordable, creating a demand for lower-priced homes that are, unfortunately, in short supply.
Changes in the Federal Housing Administration mortgage insurance premium regulations, the cost of obtaining flood insurance, and increases in property taxes were also reported to be having a negative impact on potential sales.
FHA financing regulations continued to be reported as severely impeding condominium sales.
Confidence about current market conditions declined across all markets in July 2014 compared to June 2014.
Some parts of OC is under a flood zone due to some aging channel (that suppose to be upgraded) like the Winterburg channel running from the canyon of Santa Ana to north Huntington Beach. FEMA flood maps show there’s a swath of houses along the banks of the channel are in the flood zone. If you’re in Flood Zone A the premiums can be brutal (if you have a mortgage) as you are paying at least 2k a year and it will set to rise between 15-20% in the next few years to reflect “true” risk since the FEMA Flood Fund is broke from paying for the claims from Katrina. In some cases, if you’re in the flood zone you can hire a licensed civil engineer or surveyor to prepare the LOMA (Letter of Map Admenment) to take your property (structure) out of the flood zone if your house is higher than the 100 year flood height. This cost between 6-8 hundred dollars. You only pay if the property is taken off the flood zone for the most part.
One way to check is to look at your respective city flood zone maps. If there are a few lots in your neighborhood that have their structures taken off the flood maps (changing from zone A to X) than chances are your your house will be qualified. Zone X premiums is only 1/4 of zone A premiums should you choose to continue buying flood insurance which is not required for mortgages if you’re in zone X. Hope this will help some people.
I did a lot of FEMA floodplain work when I lived in Florida. Getting a LOMA for a residential property is fairly simple; a surveyor establishes the pad elevation of your property, compares it to the 100-year flood elevation, and prepares a brief report stating the property is not in the flood zone. It’s certainly worth the cost as it dramatically reduces insurance costs.
Realtors care about volume. More transactions = more money. Period. Rising prices mean slightly higher commissions, but falling prices can mean rising sales, too. They care about the deal, even if it isn’t a good deal for the buyer or the seller. “And who can say what a good deal is anyway?” That’s what they think, so just get the sale closed.
If realtors are unhappy, then buyers should rejoice. If realtors are really happy, then you are probably paying too much. I remember making an offer on a house in 2010, and I knew I offered too much just by the way the realtor acted. I could just tell she was already spending her commission check. We ended up cancelling the deal because of an unknown school rezoning passed literally 2 days before we made the offer. This took a great deal of effort to “convince” the realtor to abide by our wishes.
I think realtors are starting to see the downside of the manipulated market. They like the higher prices, but now that they are dealing with the lower sales volumes that result, they don’t like that quite so much; further, they see no real end to low sales volumes because the toxic mortgage products that used to ensure more sales are now banned.
I believe their whining about tight mortgage standards and a lack financial innovation will get louder and louder as higher prices no longer mean higher sales volumes as they did in the past.
Report: Annual Rate of Home Sales Falling
The nationwide annual rate of the sale of residential properties, which include single family homes, condominiums, and town homes, declined by 3 percent month-over-month and 12 percent year-over-year in July, according to RealtyTrac’s July 2014 U.S Residential & Foreclosure Sales Report released on August 29.
RealtyTrac reported residential properties sold at an annual rate of 4,634,513in July 2014, which marked the third straight month in which there was a year-over-year drop in annual home sales volume.
Meanwhile, median prices of homes (both distressed and non-distressed properties) increased from June to July by 3 percent up to $191,000, its highest level since September 2008. The median price rose by 12 percent from June 2013, according to RealtyTrac.
The median price of only distressed sales (sales of properties that are bank-owned or in some stage of foreclosure) stood at $128,000 for July, a 3 percent month-over-month increase and a gain of 11 percent year-over-year, according to RealtyTrac. That price still fell way below the median price of non-distressed properties, which was $204,000.
RealtyTrac reported that the percentage of total residential property sales that were distressed sales and short sales (sales by a distressed borrower for less than the balance of the mortgage) increased month-over-month in July but declined year-over-year. Distressed sales and short sales made up 13.6 percent of all residential home sales in July, which is an increase of 12.8 percent from June but a drop of 15 percent from July 2013. The market with the highest percentage of combined distressed sales and short sales was Las Vegas, with 40.3 percent.
“As distressed sales continue to decline, the share of sales is tilting toward more expensive homes, boosting the nationwide median sales price,” said Daren Blomquist, vice president of RealtyTrac. “The nationwide home price increase, however, masks slowing home price appreciation in the majority of housing markets across the country. This slowing appreciation was expected and provides another sign that the real estate recovery thus far is behaving rationally. Still, the housing market is entering a dicey transition phase where it is becoming much more reliant on first-time homebuyers and move-up buyers to sustain the recovery as investor involvement wanes.”
“As distressed sales continue to decline, the share of sales is tilting toward more expensive homes, boosting the nationwide median sales price,” said Daren Blomquist, vice president of RealtyTrac.
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Bingo.
Visualized…
el O embraces any indicator that shows prices falling, but if prices are shown to be rising, he does his best to disparage that same data point. Even when I pointed out that actual closings were showing rapid price increases, he disparaged my data, and completely missed the run up in prices.
el O says:
April 24, 2013 at 10:49 am
Dude, stop being so naieve.
If pure values have actually risen ”about 33% in the past 3 months”, inventory would not sit at record lows.
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LOL! Yep, no 33% price increases in the Spring of 2013. How could I have been so naive?
So any commentary about data from el O should be taken with a massive grain of salt because the track record were dealing with here ain’t so hot.
Perhaps, but el O’s comments are always entertaining, and it’s always good to have a bearish skeptic and an optimistic bull to keep the conversation lively.
LOL! Dude, the topic is median price data, NOT pure values. Big difference. Way to deflect.
On a side note, now that your ‘$500K death-grip’ has been relegated to the dust-bin where it belongs (by an industry insider no-less) along with all of the other phantasmagoric marketing tools the sell-side has conjured-up, looks like it’s back to the drawing board for ya.
All the best!
-el O
Please post the quote from an industry insider debunking the $500k death grip. Thanks in advance.
Go back and read it again.
I never said the industry insider debunked it.
What I said: “the $500k death grip has been relegated to the dust-bin where it belongs along with all of the other phantasmagoric marketing tools the sell-side has conjured-up”.
The insider merely provided some quality perspective; as follows..
“As distressed sales continue to decline, the share of sales is tilting toward more expensive homes, boosting the nationwide median sales price,” said Daren Blomquist, vice president of RealtyTrac.
Big difference between debunking and irrelevance. Facts are stubborn!
His statement has nothing to do with the 500k death grip. The quote pertains to current conditions, not a trend from 5 years ago.
Thanks for playing.
Which of course works both ways. The fall in median price resulting from an increase in distressed sales was no more real in 2007-8 than the rise of median prices due to a decrease in distressed sales is today.
I don’t see a lot of value in median prices. If 10 homes sell, 3 of which are distressed; and the next month 7 homes sell, none of which are distressed; then the median price shifts upward, even if the 7 non-distressed homes are exactly the same and sell for exactly the same amount.
Your average buyer thinks that a median price rise applies to all homes equally. But it doesn’t. And the housing industry has done nothing to dispel this illusion.
In my monthly housing market reports, I report the median because it’s easy to calculate, but all my calculations on price increases are based on the $/SF metric that is less susceptible to swings based on a change in mix.
I get a kick out of the spin about mortgage applications increased at a rate double of last week.
Mortgage Apps Up 2.8% in Latest Survey
Applications for mortgage loans increased last week, helped along by gains in both purchase and refinance loans.
The Mortgage Bankers Association’s (MBA) latest Weekly Mortgage Applications Survey shows loan application volumes rose a seasonally adjusted 2.8 percent for the week ending August 22, doubling the rate of growth recorded the previous week.
On an unadjusted basis, the improvement was smaller at 2 percent.
After climbing 3 percent in the last survey, MBA’s Refinance Index gained another 3 percent in the most recent measure, bringing the refinance share of total mortgage activity up another percentage point to 56 percent, the highest level since March this year.
The seasonally adjusted Purchase Index also increased, rising 3 percent after the prior week’s 0.4 percent decline. Unadjusted, that index was up 1 percent, ending the week down 11 percent compared to the same time a year ago.
The optimistic economists are back. Will they be surprised and disappointed again next year?
Stronger hiring boosts outlook for U.S. home sales
WASHINGTON (Reuters) – Stronger job creation in the United States is making economists more optimistic about the outlook for home resales over the next two years, according to a Reuters poll that showed little change to expectations for house price rises.
The annual pace of existing home sales will likely rise to 5.25 million units in the first three months of 2015 from 5.09 million in the current quarter, according to the poll’s median forecast.
In May, economists expected much slower gains, with 5.1 million resales expected in the first quarter of next year.
Much of the added optimism draws from the six consecutive months through July in which U.S. employers added more than 200,000 jobs. The median says the annual pace of home resales will rise to 5.29 million in the second quarter of next year.
“Low mortgage rates and improving labor market dynamics should remain conducive to gradual growth in the housing sector,” Gennadiy Goldberg, a strategist at TD Securities, said in a recent note to clients.
A sharp increase in mortgage rates pushed sales of existing homes lower in the second half of 2013 but borrowing costs have been more stable in recent months and sales have recovered some of the lost ground.
Investors and economists polled by Reuters generally expect the Federal Reserve will begin to slowly increase its benchmark interest rate around the middle of next year after holding it near zero since 2008.
I don’t know, but 5 million sales sounds like a lot to me. It isn’t exactly zero. So homes are being sold, and quite a lot, actually. The median prediction is for a 3% rise in home sales, and that qualifies as optimistic?
I guess the assumptions matter. These same economists are predicting flat pricing. If prices fall by 5% would a 3% rise in sales be pessimistic? Now if the economists predicted prices will rise by 10% and sales will rise by 3%, then that would be very optimistic. A 3% rise in sales is only 150k more homes sold nationwide over an entire year. With flat pricing, 200k jobs created per MONTH, and credit loosening, a 3% rise in sales seems more realistic than optimistic.
If job growth slows, prices continue to rise, and wages fail to respond to a tightening job market, then, of course the predictions will be incorrect. Not because they were wrong, but because the assumptions upon which they were based, changed.
A 5% drop in price would probably lock up more underwater inventory due to all the FHA buyers who put only 3.5% down and begin on day one with functional negative equity (due to all the fees of selling).
Related to the problems of boomerang buyers in this post…
America’s most indebted generation? Gen X
Gen Xers aren’t making much more than their elders, and they have taken out way more debt and are reducing it at a slower pace than any other generation.
Millennials may owe more in student loans than any American generation, but their Generation X elders are actually the most in debt.
That’s according to a study released Wednesday by Federal Reserve Bank of St. Louis economists William Emmons and Bryan Noeth. The study showed that the single most indebted birth cohort in the nation are 44 year olds, who owe on average $142,077, most of that composed of mortgage debt.
But the most striking aspect of the report is just how much more in debt Gen X is than previous generations are now or were when they were the same age that Gen Xers are today. Write Emmons and Noeth:
“The average household debt of the 1970 Gen X cohort was $142,077 in the first quarter of 2014 (that is, approximately at age 44), while the average household debt of the 1956 baby-boomer cohort was $88,553, adjusted for inflation, in the first quarter of 2000 (when this cohort would also have been age 44). This represents about 60 percent more debt for the 1970 cohort compared to the 1956 cohort. Meanwhile, average real household income of the 1970 cohort was only about 5 percent higher than that of the 1956 cohort in the most recent data.”
So, while Gen Xers aren’t making much more money than the generation that preceded them, they have taken out way more debt and are reducing it at a slower pace than any other generation.
This is adjusted for inflation, but is it adjusted for rates? The average 30yrFRM in 2000 was 8.05% (Freddie Mac). Today rates are 4.13%.
Car loan rates are also much lower today. I was paying 7% on a car loan in 2000. Now I am paying 0.9%. At these rates, there is a disadvantage in prepaying. I don’t think there is as big a difference in debt BURDEN as the author implies.
This can’t be good for housing. Apparently the bullish narrative about strong wage growth is simply wrong.
For Every Education Level, Real Wages Have Gone Down So Far This Year
“The last year has been a poor one for American workers’ wages,” economist Elise Gould, who directs EPI’s health policy research, writes in the report. Analyzing data from the government’s Current Population Survey, Gould found that workers at the 20th, 30th, 40th, 50th, 60th, 70th, 80th, 90th, and 95th percentiles all experienced declines (ranging from 0.5 percent to 2.0 percent) in their real wages in the first half of 2014 compared with the same period last year. Real wages declined among workers with no high school degree (0.6 percent), with just a high school degree (1.1 percent), with some college (1.0 percent), with a college degree (1.6 percent), and with an advanced degree, too (2.7 percent).
EPI contends that’s not a fluke: From the first half of 2007 to the first half of this year, real wages declined 4.9 percent for workers with a high school degree and 2.5 percent for workers with a college degree. Workers with advanced degrees registered an increase of only 0.2 percent over those seven years. “On the whole,” argues Gould, “the broad wage trends by education level over the last decade and a half make clear that wage inequality cannot be readily explained by stories about educational credentials and technology; wage inequality has increased steadily, yet even those with a college diploma or advanced degree have experienced lackluster wage growth.”
Maybe the boom era caused everyone to be overpaid and now real wages are returning to normal. Maybe everyone needed to take a real pay cut to get the economy going again. Wage growth isn’t, by itself, expansionary. High salaries, when passed on to prices, can cause contraction as sales are lost. Once real income bottoms, it can start to rise again.
Any compensation gains over the last few years have gone to health care at the expense of take-home pay. This shows up in higher premiums and deductibles, not to mention co-pays and coinsurance. In a way, this is a forced investment in current and future health. Most of the new construction I see around town is all obnoxiously large health care facilities.
Until we start to reap the rewards, as a society, of the massive investment in healthcare, real wages are going to be second in line. But, there is a finite set of diseases to treat. Once effective treatments are established in the marketplace, investment in better treatments will greatly diminish. There will still be competition to provide more effective treatments at lower cost, but there will be less incentive to do so.
Right now, we spend trillions on ineffective treatments, due to our general ignorance of the basic processes involved in disease etiology. As we expand our knowledge we will develop much cheaper and more effective treatments, so effective in fact that many diseases will be cured. Productivity will rise as the burden of bad health is lifted; at the same time, health care costs will fall. Rising populations will usher in a whole new set of problems as demand for natural resources outstrips supply. This will keep us busy for awhile.
A certain amount of this is true, particularly in real estate and construction trades the salaries got out of line with contribution.
Also, part of the reason real wages are down is inflation. Even though the official readings are low, when wages are flat nominally, you get real wage declines.
Loan officers that were inexperienced made $100-300k per year, average ones made $500-700k, and the good ones made over $1 million.
“Once real income bottoms, it can start to rise again.”
OR globalization and the offshoring of jobs to cheaper markets has permanently gutted the U.S. middle class.
Maybe a little of both?
I view global salary arbitrage as transitory. How could it not be? I just don’t believe there are a limited amount of jobs in the world. If the person outside the US is hired, that creates a demand for goods or services that person buys in their home country. Some of those goods are produced domestically, and some abroad. Either way the general state of commerce rises and wealth builds. Soon, developing countries become trading partners, buying our exports. As a developed nation, we need more customers. What better way to get them than via higher standards of living in developing nations.
This is similar to the automation destroying jobs argument. But consider that, despite 200 years of automation, there are more people employed now than ever before. Is automation destroying jobs or creating them?
“If the person outside the US is hired, that creates a demand for goods or services that person buys in their home country.”
Absolutely. China is a case in point – look at their booming economy, compliments of US manufacturing jobs shifting over there.
“…we need more customers. What better way to get them than via higher standards of living in developing nations.”
Soon China and India will have stores filled with US manufactured products, and our middle class will be saved. A light at the end of the tunnel.
“If Millennials and boomerang buyers never materialize, the lack of housing demand will prevent homebuilding from being the large economic force it once was, the home ownership rate will remain near the 64% average it sustained for 40 years prior to the temporary surge from subprime lending, and the home price appreciation that enriched the Baby Boomers will not materialize for subsequent generations.”
But, even if the Millenials don’t BUY houses, they will need to RENT them. Either way, they are occupying a housing unit. As population grows, the number of required housing units will grow, too. This is demand for residential construction. A sustained decrease in home ownership rate is the only way new construction demand won’t grow. And don’t forget there are about 400k units/yr required just for replacement. While home building may never be as large an economic force as it was in the recent past, it will still be necessary for an expanding population.
The appreciation baby boomers experienced was largely due to falling interest rates. As rates fell, purchasing power rose, and amortization rose. Refinancing at these lower rates provided an instant boost to discretionary spending, which drove up consumer prices and salaries.
From a buyer’s perspective, isn’t fewer competitors entering the market more desirable? If Millenials decide not to buy, boomerang buyers are reluctant to buy, and the 43% of those 35-49 who are underwater are unable to sell and buy; then I’m doing my happy dance, aren’t I? It’s as though the other team has two players in the box, and we have a 5/3 powerplay for the rest of the game. Awesome. Ten years from now I’ll have dozens of baby-boomer McMansions to choose from with no other competing buyers. HaLaa!
Where’s the problem? I may take a hit on the sale of my current home, but I will still have a lot more equity than any of the above three cohorts thanks to amortization at 4% rates. While everyone else is too scared to act, move forward and press your advantage. The economy is recovering. There won’t be another collapse in housing prices, at least not for awhile.
Attitudes will revert to the mean. The mean being a desire to minimize lifetime housing costs, and not carry a mortgage or rent payment into retirement. This may take a generation, but so what? You might as well be paying off your mortgage while you’re waiting for the next boom to occur.
Unfortunately, I believe we are witnessing a sustained drop in the home ownership rate back to the stable levels witnessed from about 1950 to 1995. The subprime experiment that boosted home ownership rates from 64% to 69% will be looked back on as a failure.
You may want to repeat the rest of your comment tomorrow when I take a look at whether low rates or low prices are better. I totally agree with your analysis.
Looks like we are already there in California (54.5% Q1 2014; 54.3% 1950). Nationally we are well above the 1950 rate of 55.0%, which rose to 61.9% in 1960, 64.2% in 1990, and stands at 64.7% today. Where do you see us ending up? Interestingly, as rates rose in the 70s, home ownership actually rose in California (54.9% 1970 to 55.9% 1980).
Personally, I find it very difficult to know, with any degree of certainty, where homeownership rates go from here. It’s not just a matter of demand, but also supply. In order for homeownership rates to rise, a rental needs to be converted to owner occupied. For that to happen, the landlord has to want to sell. As rates rise, prices fall, and comparable rents start to look a whole lot better (and an expanding economy also causes rents to rise).
On the other hand, a sustainable rise in rates is only possible if the economy is doing well. So demand will rise from expanding population, but perhaps not from rising purchasing power as rising rates diminish the effect of rising salaries.
Here are some links on historical homeownership rates.
https://www.census.gov/hhes/www/housing/census/historic/owner.html
July’s pending home sales put housing back on track
http://www.housingwire.com/articles/31195-julys-pending-home-sales-put-housing-back-on-track
Pending home sales returned to positive increases as July was able to make up for the lag seen in the housing market in June.
According to the latest National Association of Realtors Pending Home Sales index, a forward-looking indicator based on contract signings, sales jumped 3.3% to 105.9 in July, up from 102.5 in June, but still down 2.1% from July 2013.
On the other hand, the index is at its highest level since August 2013 and July marks the fourth time the index has increased in the last five months. The index is also above 100, which is considered an average level of contract activity, for the third consecutive month.
That is a surprising late-season increase. If this isn’t revised downward, and if it isn’t wiped out by a big decline next month, I may have to revise my thinking on how weak this fall and winter will be. Perhaps the job growth of the last six months is starting show in the housing numbers.
There doesn’t seem to be any correlation between the purchase apps index and the pending home sales index lately. I’m beginning to wonder if there is something to Bill McBride’s thesis that the MBA purchase index is flawed. He said it was because they overweight large banks in the survey results, but I also think it might have to do with the channel.
According to the methodology: “As of September
21, 2011, the Survey is projected to cover more than 75 percent of all U.S. mortgage applications originated through retail and consumer direct channels. Loan applications delivered through wholesale broker or correspondent channels are not covered in this Survey.”
http://www.mbaa.org/files/Research/HistoricalWAS/WASMethodology.pdf
Well, the wholesale broker and correspondent channels have expanded greatly from three years ago. Late 2011 was around the time that most of the large banks got out of wholesale and correspondent, which would make it the low point for such activity post-crisis. Ever since then, many of the medium to small lenders have been building wholesale and correspondent platforms to seize on this market share given up by the larger banks. Therefore, as a proportion of mortgage applications, wholesale and correspondent have increased greatly since late 2011, but these applications are not counted in the MBA survey. That’s my theory for why the purchase index doesn’t seem to track home sales very accurately anymore.
If your assessment is accurate, and it sounds reasonable, then purchase applications are losing their predictive power. Purchase applications were a great leading indicator in the past. Perhaps the growth of correspondent lending will level off, or perhaps they will start to report to the MBA, but as long as the growth in the industry is in an unreported segment, the index will lose it’s value as an indicator.
I don’t think his assessment is accurate; ie., NAr reports ‘pendings’
nuff said
“the index is at its highest level since August 2013”
“There doesn’t seem to be any correlation between the purchase apps index and the pending home sales index lately.”
There doesn’t seem to be any correlation to mortgage applications, either. Highest level since August 2013? What a disconnect.
Love reading this bollocks. We have growth because the credit spigot has been expanded and with some help from inflation. But much of main street is still dead broke. Can’t believe we have another mirage so soon after the last one.
http://www.forbes.com/sites/stephenpope/2014/08/28/america-accelerates-as-growth-gallops-at-4-2-perecent/
Trey Garrison isn’t going to like this. He promised to eat something nasty if the reading didn’t go down.
Of course, it’s also possible that this number is completely manipulated bullshit:
If this number doesn’t get revised down later, or if it isn’t followed by a terrible reading after the election, then the economy might finally be finding its footing.
I guess I am an extremist and a radical now, particularly since I believe this man’s contention about the financial system going belly up is complete bullshit. But it gets worse…
This is the kind of nonsense that always follows a recession. Everyone congratulates the federal reserve for saving the day when their policies are just as likely to have made matters worse and dragged out the recession for seven years. If the destruction of 2008 had been worse, the last six years would have been better.
Trey said he would eat 50 eggs, ala Cool Hand Luke, if the initial estimate came in higher than 2%. It came in at 4%. Yesterday, he promised to take the ice bucket challenge with tomato soup if the figure was not revised down. It wasn’t.
http://www.housingwire.com/blogs/1-rewired/post/31196-watch-a-housingwire-writer-do-the-als-challenge-with-tomato-soup
IR: It has been years since I’ve offered comment, but I am a daily reader.The collective wisdom in this forum (mostly from IR) inspired me to change my approach to money and has provided my children with a better footing going forward. I recently joined the ranks of the un mortgaged, having moved up our payments over the last five years. First we had to jump off of the re-fi (cash out) cycle. Then we got our kids through college debt free. When my son-in-law was faced with a life threatening illness, it didn’t impact their house because they made sure it was affordable on one salary.People think I’m smart, I actually just listen to smart people. I’ll retire in two years (maximizing catch-up) with the peace of mind that comes with relatively fixed housing costs.I always appreciate the divergent opinions, I’ve learned a lot. Thanks!
The rate of ownership will not and should not return. It was artificially inflated through innovation, inflated by pulling forward and exhausting demand. Among those brought into “ownership” were many who would not have participated without manipulation.
Sac_Boomer,
Thanks for your comment. It makes me feel good to hear people find wisdom here, put it to use, and now are reaping the financial and emotional benefits.
You will have a wonderful peace of mind in your retirement, something I believe you will find priceless.
Thanks for your kind thoughts. I’ve talked about this site so much my poor wife rolls her eyes. My son on the other hand earned a degree in economics. I have a question: Is the quote on suffering (from the piece on unceremonious fall from entitlement)attributable to you? I have it up in my office, and I use it is supervising therapists. I would like to properly attribute it.
SB
That is my synopsis and paraphrasing from a work by the author Jack Kornfield in The Roots of Buddhist Psychology. Interestingly, I am listening to these tapes in my car right now for the first time in about 3 years. Strange coincidence that this thread would pop up.
The link above will lead you to the site where you can get his work. I’ve listened to those teachings 20 times or more over the 18 years I’ve had them. It’s timeless wisdom.
There was a story in the news about how young people used to value having the latest fashions, which made clothes like Abercrombie & Fitch, American Eagle, etc. very hot with the young crowd. Now the story says that young people value the latest tech gadgets more than clothes, so having the latest cell phone or video game is what is popular. Styles change. Zillow has an article about how youngsters either don’t want to buy homes or want to buy super small homes…
[…] Millennials will follow the same path as preceding generations once they have opportunity, but what if Millennials decide not to buy homes? Baby Boomers don’t want to think about that […]