Long-term weakness in housing: a generation of missing homebuyers

The housing bubble pulled forward a generation of buyers; the housing bust cost these buyers their homes and their good credit, removing many of them permanently from the housing market.

Lenders succeeded in manipulating market prices by restricting supply; however, for a true recovery in housing, the market requires resurgent demand from first-time homebuyers and move-up buyers. These two groups are typically the largest source of housing demand, with the first-time homebuyer the bedrock of the housing market; without first-time homebuyers, no move-up market exists.

The first-time homebuyer market propels upward by job growth and household formation; when the economy is strong and creating good-paying jobs, young people form new households and use their new income to bid for real estate, displacing existing homeowners who then execute a move-up trade, often buying a nicer home.

That’s how the market is supposed to work, but the collapse of the housing bubble destroyed the fundamentals underpinning a strong housing market. Household formation dropped from 1.5 million households per year to 500,000 per year. The first-time homebuyer market dried up, and as a result, rather than comprising 40% of sales, today they only make up 29%. Further, with 25% of existing homeowners underwater and another 20% effectively underwater and unable to sell and execute a move-up trade, demand from the move-up market is also down by a third or more. Only investors are keeping the market afloat. Without the manipulation of inventory by desperate bankers, the housing market would almost certainly see a dramatic downturn.

What happened to the first-time homebuyer cohort? In The Great Housing Bubble, I wrote about the perils of 100% financing, which most young buyers used:

Besides stopping people from saving for down payments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the down payment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once down payment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the down payment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.

Housing analysts crunching numbers confirmed what I wrote six years ago. Apparently, this didn’t occur to them as they seem surprised by the outcome.

The Subprime Generation

Chris Porter, John Burns Consulting, January 2014

Talk about an amazing reversal of fortune! This may be the most amazing, underreported demographic fact today.

  • 30-34 year olds in 2012 had the lowest homeownership rate of any similarly aged group before them!
  • Five years prior, this exact same group had the highest homeownership rate at 25-29 years old than any group before them!

It is exactly what I described in the book. The demand was pulled forward, the buyers were wiped out, and now they are absent from the ownership pool and the potential buyer pool — which is really the bigger story here because those former owners, the hoped-for boomerang buyers, historically only one-third ever regain home ownership. (See: Pent-up demand from boomerang buyers may not materialize)

Using homeownership-by-age data from the Census Bureau, we compared households by years of birth to examine how homeownership changes over consumers’ lifetimes.

  • Lowest ever in 2012: 30-34 year-olds in 2012 (born between 1978 and 1982) had a 47.9% homeownership rate. This is a full 6.5 percentage points lower than those five years older had achieved at the same age and lower than any group before them! (This is based on data available beginning with those born in 1948.)
  • Highest ever 5 years prior: Those same 30-34 year-olds had a 40.5% homeownership rate 5 years prior when they were 25-29 years old in 2007. This is 6.2 percentage points higher than 25-29 year-olds in 2012 and higher than any 5-year cohort before them.

Our consulting team has been pointing out a real dearth of entry-level buyers over the last several years, which is counterintuitive when you consider that this has been the most affordable time in generations to buy a home. What we learned is that a huge percentage of households bought a home earlier than usual, and that same group has gone through more foreclosures than any generation before them.

The data and analysis are excellent. The generation pulled forward by 100% financing, the group least likely to have a down payment, purchased homes in large numbers and obtained the highest home ownership rate that group ever recorded; the bust wiped them out.

What does this mean? It is more difficult than usual to sell entry-level homes today,

That’s the truth of the matter. (See: When will first-time homebuyers return to the market?)

but the pent-up demand for entry-level housing is huge.

That’s merely wishful thinking. The largest study ever conducted on the behavior of people who lost homes in foreclosure revealed that less than one-third ever buy again (See: Credit Access Following a Mortgage Default) Analysts may hope this demand pent-up, but there is no evidence to suggest this generation of foreclosed former owners will behave any differently than previous generations did, and there is ample reason to believe they will be turned off ownership in favor of renting for the rest of their lives.

Stay tuned as we continue to unearth the future of housing for the Subprime Generation.

In the post Bold California housing market predictions for 2014, I stated my contention that boomerang buyers will not materialize in 2014. I stand by that prediction.

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More than 5 years squatting

The former owner’s of today’s featured REO bought back in May of 2004 with no money down. They refinanced again shortly thereafter with an Option ARM with a 1% teaser rate. Since they didn’t have anything in to the property, they quickly bailed when prices stopped going up, and the first NOD on the property was served in September of 2008. The property wasn’t auctioned until October 2013 — a full five years later.

WTF took the bank so long?

[idx-listing mlsnumber=”PW14015559″]

5039 East WOODWIND Ln Anaheim Hills, CA 92807

$572,000 …….. Asking Price
$505,000 ………. Purchase Price
5/28/2004 ………. Purchase Date

$67,000 ………. Gross Gain (Loss)
($45,760) ………… Commissions and Costs at 8%
$21,240 ………. Net Gain (Loss)
13.3% ………. Gross Percent Change
4.2% ………. Net Percent Change
1.3% ………… Annual Appreciation

Cost of Home Ownership
$572,000 …….. Asking Price
$114,400 ………… 20% Down Conventional
4.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$457,600 …….. Mortgage
$112,610 ………. Income Requirement

$2,294 ………… Monthly Mortgage Payment
$496 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$119 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,909 ………. Monthly Cash Outlays

($433) ………. Tax Savings
($613) ………. Principal Amortization
$185 ………….. Opportunity Cost of Down Payment
$163 ………….. Maintenance and Replacement Reserves
$2,211 ………. Monthly Cost of Ownership

Cash Acquisition Demands
$7,220 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,220 ………… Closing Costs at 1% + $1,500
$4,576 ………… Interest Points at 1%
$114,400 ………… Down Payment
$133,416 ………. Total Cash Costs
$33,800 ………. Emergency Cash Reserves
$167,216 ………. Total Savings Needed
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