People desire homeownership but fail to save for down payment

A large majority wants to own a house, but only a small minority is actually saving money to meet that objective.

caddyshack_turd_ihbThe last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people’s inability to distinguish between desire and demand.

The financial media frequently entreats us to stories about how home ownership is not dead because surveys proclaim 88% still desire to own a home. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit.

True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand.

corporate-newsWhen realtors or their shills in the financial media make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.

I want to point out to everyone exactly how the financial media operates:

  • First, they believe people read financial news to get good news, so they spin every piece of information in a positive light, and they quote every economist willing to tell people what they want to hear.
  • Second, they will repeat their spin in groupthink fashion until it becomes conventional wisdom (Do you remember how hard they worked to convince everyone slow real estate sales in 2014 was due to weather?)
  • Third, they squelch any dissent from their groupthink wisdom with dismissive articles ridiculing contrary ideas or attacking the credibility of contrary messengers (Rembember John Burn’s quote about Mark Hanson, “I give him zero credibility”?
  • Fourth, when reality proves them wrong — which happens quite often — they disremember the bad information they disseminated and respond incredulously to reality.

When it becomes impossible to ignore reality, they slowly break the bad news, “Sorry, our cover story is bullshit, and the housing market really is in trouble.” Somewhere in there, the financial media should apologize for leading readers astray, but most reporters probably know their readers are hearing what they want to hear anyway, so they don’t feel responsible for misleading them.

I write derisively about the mainstream media quite often, and it isn’t because I harbor some secret jealously or deep desire to be one of them. I find it offensive how they mislead people with bad information or shoddy analysis. People deserve better, particularly those considering making the largest financial purchase of their lives.

Renters aren’t saving to buy a house

Diana Olick, Wednesday, 18 Nov 2015

Looking across the vast spectrum of housing surveys today, most will claim that the majority of renters want to buy a home eventually. That may be, but they’re not saving to do that.

In other words, that desire is not translating into demand.biggest_saver

In fact, saving for a down payment to buy a house ranks fourth on their list of priorities, … Only 39 percent said saving for a down payment. This is particularly surprising given fast-rising rents. …

Potential homebuyers can’t save for down payments with high rents. Very few potential homebuyers have the necessary down payment, even the paltry 3.5% required by the FHA. And since renters put a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. There is no magic bullet or simple solution to this problem.

“We know rents are rising faster than incomes, and now we have data to show that many renters don’t have enough to pay all their debts each month, which is forcing them to make tradeoffs, such as cutting spending on other items,” said David Brickman, executive vice president of Freddie Mac Multifamily.

Tepid wage growth and rising house costs prices out low-income householdspropert_ladder_pressureWhen supplies are limited, as they are now due to the presence of so many underwater borrowers stuck in the purgatory of cloud inventory, the substitution effect forces buyers at every price level to buy a lower quality house than they otherwise would. At the very bottom of the housing ladder, those buyers who can only afford the least expensive properties get priced out by higher wage earners substituting downward.

The share of renters who say they now have to put off plans to purchase a home rose to 55 percent in October from 44 percent in the last Freddie Mac renter survey in June. This occurred even as more said they would like to buy a home and have started looking.

Add it up and the lack of affordability is the answer. Renters may be looking, but they’re not buying because they are faced with rising home prices and rising mortgage interest rates.

When asked the main reason they expect to still be renting three years from now, the top three answers had to do with affordability. The fourth was not good enough credit.

Affordability will be the major housing market issue of 2015, and 2016 for that matter. affordability_ceilingThe pressures on lenders to obtain business prompts them to expand loan programs and develop “innovative” loan products in order to keep sales volumes up when prices reach the limit of affordability. However, Dodd-Frank effectively banned these products, so the ceiling of affordability will be much more rigid going forward.

The inconvenient truth

The story the financial media doesn’t want to tell inadvertently leaked out in the story above. The consensus narrative is that Millennials will return to the housing market in large numbers stimulating housing demand. They primary reason they cling to this hope is because of feel-good surverys that show 88% still desire to own a home. However, since only 39% are actually taking action to turn that desire into demand, the inconvenient truth remains: Housing demand will be remain low for the foreseeable future.


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