Top 10 reasons housing under-performs in 2014
The housing market under performed by nearly every measure from economists expectations in 2014 for a variety of reasons.
The housing market rebounded strongly in 2012 from a six-year decline, and in early 2013, the market sustained the momentum it gained in 2012. Economists succumb to their optimism bias and failed to correctly forecast the interaction of negative circumstances that caused sales volumes to decline significantly in 2014. Most economists were predicting an increase in sales volumes and price as the market supposedly achieved “escape velocity” in 2012 and 2013. It hasn’t worked out that way.
Today’s post examines the top 10 reasons the housing market underperformed in 2014. Notably absent from this list is the favorite laughable excuse of inept economists: the weather. For the record, I will flately state that weather conditions had absolutely nothing to do with the slowdown in sales in 2014; it never did. This was a ridiculous idea when it was first suggested, and it still has no support in any data. In my opinion, offering the weather as a reason for blowing an economic forecast should be more embarrassing to economists than simply admitting they were wrong.
May 27, 2014, By Peter Miller, Contributor
By now the housing market was supposed to be booming. Combine a growing population, low mortgage rates, years of pent-up demand, fewer foreclosures, lower unemployment plus a generally-better economy and the stage should be set for a very nice real estate lift-off.
It hasn’t happened …
With the exception of the “pent-up demand” statement, the above list of conditions should contribute to a strong housing market. When those forces aren’t capable of stimulating demand, something must be very wrong with housing.
“After a decade of boom-bust-boom,” explains Bloomberg Businessweek “the U.S. housing market is going downhill just when many economists thought it would be heading higher.”
“Some growth was inevitable after sub-par housing activity in the first quarter,” said Lawrence Yun, chief economist with the National Association of Realtors “but improved inventory is expanding choices and sales should generally trend upward from this point. Annual home sales, however, due to a sluggish first quarter, will likely be lower than last year.”
Here’s another term for “improved inventory.” It’s called “more unsold homes.” There’s now a 5.9-month supply of homes for sale versus 5.2 months a year ago and total existing home sales for 2014 are expected to be lower than last year.
LOL! Yes, improved inventory is a euphemism for unsold homes. The reality is that the number of new listings isn’t up much at all, but the demand is so much lower that unsold homes are starting to pile up. That is clearly not a good sign; however, since must-sell shadow inventory has morphed into can’t-sell cloud inventory, this stockpile of unsold homes doesn’t signal any imminent decline in prices, particularly since inventories are still very low by historic norms.
… why have home sales stalled? Let’s look at five possible reasons.
First, … Household formations are down.
“Over five years during and after the 2007–09 recession, the number of households established in America plummeted by about 800,000 a year from the previous seven years,” according to the Federal Reserve Bank of Atlanta. In other words, four million additional household have not formed, a huge problem because new households have traditionally been a major source of first-time buyers. Imagine how different the real estate picture would be if household formations were at normal levels and we had an additional 200,000 sales per year.
In 2013 we formed just 448,800 households, representing a 48 percent drop in household growth relative to that from 2012 and marking the lowest annual household growth measure since 2008, in the depths of the Great Recession. (See: Home sales down, household formation down, purchase applications down: Housing recovery?)
Second, fewer of us are entering the real estate marketplace.
According to NAR, first-time buyers represented 29 percent of the market in April. That sounds like a lot but traditionally first-timers make-up about 40 percent of all buyers.
It’s an open question as to when first-time homebuyers will return to the market, but they will eventually. They must; investors are abandoning the market, and without first-time homebuyers, there is no move-up market, and sales volumes will really crater. (See: Reflating housing bubble pricing out first-time homebuyers)
The lack of first-time buyers breaks an essential link in the usual chain of real estate sales. First-time buyers typically purchase entry-priced homes. The sellers of such properties can then move-up to bigger-and-better homes. In turn, the owners of bigger-and-better homes can then move-up to even larger and more wondrous properties but without the usual level of first-time purchasers a lot of entry-level homes take longer to sell or never come to market. The result is fewer move-up buyers and a weaker overall marketplace.
Third, the impact of the foreclosure meltdown is not over.
“Contrary to the claims of many observers that the recent rise in housing prices is solving the nation’s foreclosure and related economic crises, millions of families continue to face financial devastation from which many may never recover,” says a new report from the Haas Institute for a Fair and Inclusive Society at UC Berkeley. Entitled “Underwater America,” …
Today’s loan modifications are tomorrow’s distressed property sales because removing distressed sales from the current market does not remove the distress. Lenders merely deferred the problem for another day, and the backlog of distressed inventory still must be resolved. Borrowers are happy to play along. The potential to sell without a loss and perhaps make a few dollars compels most underwater borrowers to agree to often onerous loan modification terms, avoid short sales, and keep their homes off the market. Underwater borrowers are largely responsible for our gilded age of low housing inventory.
Fourth, lower mortgage rates have not helped sales.
The usual understanding is that lower mortgage rates are the surest path to more home sales. Drop mortgage rates, affordability soars and it becomes easier to qualify for a loan at every income level.
There’s no doubt that mortgage rates are soft and mushy. They’re not down to the historic lows seen in 2012 but they’re not far off. …
The main reason buyers aren’t buying is because they can’t. The buyer pool has been depleted by the recession. Fewer buyers qualify for loans because they have bad credit from excessive debt loads or a recent foreclosure or short sale. Plus, few people have the requisite down payments to buy a house at California prices. Prices are now affordable on a monthly payment basis, but until people go back to work, repair their credit, and form new households, demand will remain weak. (See: Record low interest rates fail to spur demand)
Fifth, new home builders have missed the mark.
With household incomes down it follows that a lot of would-be buyers are not looking for “starter mansions” and yet builders continue to churn out massive homes with big price tags.
“The average home size has continued to rise for the past four years, from 2,362 square feet in 2009 to 2,679 square feet in 2013,” said Rose Quint, assistant vice president for survey research with the National Association of Home Builders.
If interest rates were not held near zero by the federal reserve, and if millions of homes were not held off the market by underwater borrowers, homebuilders would be supplying large numbers of affordable, entry level homes; however, that’s not what they are building today. In most markets, homebuilders are building for move-up and wealthy buyers because there is a shortage of these homes on the MLS, and because those are the only customers with the credit and down payment to close the deal. (See: Housing market manipulations give homebuilders false signals)
5 Other Reasons Housing is under-performing in 2014
6. Large real estate investor purchases steeply decline in California. A large portion of the buyer pool simply went away, and unless prices fall, they aren’t coming back.
7. 9.7 million loanowners are underwater. They can’t sell and they can’t buy, so they are effectively removed from participation in the real estate market.
8. The economic recovery creates low-paying jobs that fail to stimulate housing. If the new jobs don’t pay well enough to buy a house, then home sales will be weak, which they are.
9. Excessive student loan debt is another long-term drag on housing. Even those recent graduates fortunate enough to find a good-paying job often are burdened with so much student loan debt they don’t qualify for a home loan.
10. Lack of boomerang buyers keeping purchase originations down. People who got foreclosed on were expected to return to the housing market in large numbers, despite the fact that data shows only about 25% ever do. A large number of people will decide to rent for the rest of their lives.
There is also a number of issues that will plague the housing market well beyond 2014.
1. Most Millennials won’t qualify for a mortgage until 2019. The student loan debt issue won’t be resolved in 2014.
2. Today’s loan modifications are tomorrow’s distressed property sales. Although reported shadow inventory numbers are down, since must-sell shadow inventory has morphed into can’t-sell cloud inventory, those properties are removed from the market today only to be added to the market in the future. This represents an overhang of distressed inventory that will slow appreciation to a crawl when it’s finally liquidated.
3.A long-term rise in interest rates will slow home price appreciation. There is mounting evidence of housing market’s extreme sensitivity to mortgage interest rates, and higher mortgage interest rates lead to lower sales or lower prices.
Does any of this matter? Are prices going to crash again?
Probably not. The restriction of inventory overrides all problems. Higher house prices are here to stay.