High home prices enrich existing homeowners and impoverish recent homebuyers

As home prices move higher, existing homeowners cheer, but new homebuyers assume excessive debts to climb the property ladder.

Most people accept the idea that ever-rising house prices are good, and that a decline in house prices is bad. However, this idea appears to only apply to housing. People don’t cheer when food or gas prices go up, but they do when house prices rise.

Of course, food and gas are immediate consumption items, whereas a house is both an item of consumption and an asset. This fact often prompts people to pay absurd prices to satiate their desires, believing that it’s a “good investment.” Most of the time, buying a house is a good investment, but late in the economic cycle or during a mania — times when housing looks like the best investment — housing generally underperforms or even goes down in value.

When house prices rise, owners accumulates equity. The simple fact is people want higher house prices because they want the financial gain of owning an appreciating asset. Nothing more.

Unfortunately, accessing this financial windfall requires either borrowing against the property or selling it. Since selling it means owners can’t gain from future home price appreciation, most people tap this equity by borrowing money, and many people depend on these cash infusions, operating personal Ponzi schemes. When these debt structures collapse, many borrowers lose their houses and suffer the unceremonious fall from entitlement.

High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher. Recent homebuyers are impoverished in order to enrich those who came before them.

Homeowners twice as house rich as five years ago

Diana Olick, November 1, 2016

America’s housing market is heating up again, fortifying the finances of current homeowners and frustrating potential first-time buyers.

It’s a generational transfer of wealth, and so far, the Millennials aren’t willing to participate. Apparently, they don’t want to spend their entire adult lives working to enrich previous generations.

The amount of equity homeowners now have — the value outside their mortgage debt — has doubled in the last five years, according to CoreLogic. …

“Home-equity wealth has doubled during the last five years to $13 trillion, largely because of the recovery in home prices,” said Frank Nothaft, chief economist for CoreLogic. “Nationwide during the past year, the average gain in housing wealth was about $11,000 per homeowner, but with wide geographic variation.” …

Californians made much more than $11,000 per homeowner.make_a_deal

Homeowners today show more wealth on paper, but they are not extracting it at nearly the rate they did during the last housing boom. Near-record-low mortgage rates have certainly prompted thousands of borrowers to refinance and lower their monthly payments, but a very small share have extracted cash in these refinances and home equity lines of credit (HELOC).

“That weakness of active home equity withdrawal looks in large part to reflect tight credit conditions. Although lenders have reported loosening lending standards for HELOCs in each of the past 15 quarters, that easing has been modest compared to the conventional mortgage market,” wrote Matthew Pointon, property economist with Capital Economics. “Indeed, median credit scores for new HELOC originations have not declined at all over the past couple of years, despite the serious delinquency rate on those loans dropping to its lowest since records began in 2008.”

He is probably right that lenders refuse to enable Ponzis like during the last mania, but I would like to believe people aren’t quite so stupid either. But then again, if lenders were willing to support the personal Ponzi schemes of low FICO borrowers, they would certainly take the money.


So homeowners get richer, and those trying to become homeowners have to face not just higher prices, but a severe lack of homes for sale, especially at the entry level. There is clearly demand, just not enough supply.

“After all, measures of home purchase sentiment are elevated, and there is evidence that first-time buyers are making a welcome return to the market,” added Pointon.

Sentiment is a worthless indicator. People may desire homeownership, but they fail to save for down payment, and without a down payment, first-time homebuyers will not return to the market.

They are returning, but still not hitting their historically normal share of homebuyers. While the National Association of Realtors reported … first-time buyers … have been dropping pretty steadily from a high of 40 percent in May to 34.8 percent in September, according to Campbell/Inside Mortgage Finance. That was the lowest level recorded since April 2014.

The slowdown in first-time buyers is likely due to higher home prices. First-time buyers are much more price-sensitive than the rest of the market, and they are also more limited in credit availability.


Housing affordability is now below average in half of the nation’s top 20 metropolitan markets, according to John Burns Real Estate Consulting. These include Denver, Houston, Austin, Texas, and Nashville, Tennessee.

“This means that they are at high risk of a sharp price correction whenever the next recession hits,” the Burns researchers said.

Affordability will be the major housing market issue of 2017. 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 surveys 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 remain low for the foreseeable future.