Jul282014
New home sales plummet in June 2014
Stymied by high prices amidst weak job and wage growth, new home construction fell dramatically in June.
This wasn’t supposed to happen. Reflating the housing bubble was supposed to lift distressed loanowners above water, stimulate building (and construction employment), and create “escape velocity” in the housing market. Economists had it all figured out, and they advised policymakers to stimulate housing at all costs. Instead, high house prices made housing unaffordable to marginal buyers, and caused sales volumes to plummet. Since builders can’t sell homes, they aren’t building them, and they aren’t hiring construction related trades, so the sought after economic boost isn’t happening. So why did it turn out this way?
The new mortgage regulations changed how real estate markets work. The new mortgage regulations will prevent future housing bubbles (we hope), but we witness the success of these new regulations by an unanticipated change in housing market behavior: high prices are hurting sales volume. The conventional wisdom among housing economists states that rising house prices creates “escape velocity” because potential homebuyers become more motivated to capture appreciation and for fear of being priced out. As a result they compete with one another and drive prices higher. Kool aid is eternal, so the motivation exists, but the key enablers (lenders) of this foolish buyer behavior can’t play their usual games because the new mortgage regulations curtailed affordability products.
Housing escape velocity requires affordability products
When prices get too high and potential buyers can’t afford the houses they want, the first reaction of realtors and mortgage brokers is to suggest the buyer use an affordability product so they can borrow more money with the same payment (rather than substitute down in quality to a different property). This keeps the existing deal alive, makes the realtor and the lender money, and puts the buyer in the home they want. What could be wrong with that? Well, take that approach to every buyer and every deal in the marketplace, and very soon, affordability products proliferate, prices inflate, and the entire market becomes unstable. Over the period of a few years, the lending market becomes saturated with amortizing ARMs, then interest-only ARMs, and finally Option ARMs (Remember 2002-2006?).
Once financing crosses the Ponzi threshold of interest-only loans, the market destabilizes, mortgage defaults accelerate, and a credit crunch becomes imminent; it’s only a matter of time before lenders realize their folly and abruptly stop making bad loans. Once that happens, credit tightens, and lenders retreat to the stability of 30-year fixed-rate mortgages. Rather than repeat this cycle and endure another painful housing bubble, legislators passed the Dodd-Frank law and put in place new qualified mortgage rules and ability to repay rules (See: Will the “Ability to Repay” rules prevent reckless lending?).
Without escape velocity from affordability products, previous economic theories about housing fail — miserably. Since so much economic policy is based on this flawed theory, all the policies designed to stimulate housing fail to justify the costs. We are approaching a frozen market with most of the available inventory suspended in the clouds at prices today’s buyers can barely afford. Further, with a likely rise in mortgage rates forthcoming, the problem will likely get worse, and sales volumes may be weak for several more years.
New-Home Slowdown Pressures Recovery
Economic Growth, Labor Market Face Headwinds
By Eric Morath and Kris Hudson, Updated July 24, 2014 6:47 p.m. ET
Demand for new homes slowed sharply during the first half, a development that threatens to reverberate beyond the housing market and throughout the broader economy.
Sales of new single-family homes fell 4.9% through the first six months of the year compared with the same period of 2013, according to Commerce Department data released Thursday. June sales fell 8.1% from the prior month, and the May number was revised down from the best figure in six years to not even the best figure in six months.
Do you remember the headlines last month touting the strength in housing based on the great new home sales? Turns out it was complete nonsense. When you reflect on it, the news concerning loan originations has been bad all year, and existing home sales are still down, so there was reason to suspect the numbers from the outset.
John Burns, chief executive of a housing-research firm that bears his name, posits that shell shock from the real-estate bust, mounting student-loan debt and last year’s steep increase in new-home prices continues to deter buyers. “I just think there’s a real lack of confidence to buy a home and take on a mortgage right now, which is really hurting the housing market,” he said.
He says that now, but that’s not what he was saying a month ago.
The lack of vigor in the new-home sector could have wide ramifications for the economy heading into the year’s second half, weighing on economic growth and job creation in the well-paying construction sector. Home construction was a major employment and growth engine before the recession—historically accounting for 5% of the U.S. economy, according to the National Association of Home Builders. That figure has fallen to about 3% in recent years.
The side effect policymakers used to justify unlimited housing stimulus was an expected increase in construction employment that hasn’t materialized — and with good reason if they can’t sell the houses they’re building.
“Housing has clearly been a notable area of persistent sluggishness beyond early-year weather disruptions,” said Ted Wieseman, an economist at Morgan Stanley.
The weather… ~ giggles to self ~
It was never the weather; the weather was a convenient excuse, it was plausible enough to buy several months of false hope, but since the weather was never the problem, the real issues of declining affordability and weak job and wage growth finally surfaced.
The main impediments to home construction have shifted in the past year to weakness in demand rather than supply. …
Now, several factors have combined to hamper demand. Rising property values brought more existing homes to the market, creating cheaper competition for new homes.
Competition from existing home sales was never a variable economists considered. Demand was supposed to surge, despite higher prices, and both cloud inventory sales and new home sales were supposed to increase.
Steep price increases in the past two years put new homes out of reach for some buyers. …
No kidding.
And while job growth has picked up, wage gains remain tepid and mortgage-qualification standards too strict for many would-be buyers.
Job growth has been largely part-time and low-paying jobs that don’t provide the income to afford the payments even at low rates.
The absence of momentum in new-home sales heading into the third quarter, along with no improvement in mortgage applications and still-tight lending standards “raise serious questions about the state of the housing market going forward,” said BNP Paribas economist Yelena Shulyatyeva.
Weaker demand for new homes could also curtail construction-employment gains. A slowdown in construction hiring would be a concern because those jobs tend to pay more than positions in retail and food services. In the second quarter, the economy added 94,000 retail jobs and 51,000 construction positions. …
How many retail jobs pay enough to finance a house?
Jobs in residential building have increased 2.6% so far this year, outpacing a 1% gain in overall employment. But with signs that building is slowing, the pace of hiring could be difficult to maintain.
The pace of overall hiring has strengthened this year, with employers adding better than 200,000 jobs for five consecutive months, but the gains have yet to translate into better pay for many Americans. Wage growth has only kept pace with inflation during much of the recovery.
“The labor market may be getting better but wage gains are not and until that happens, families will not be buying new homes at any great pace,” said Joel Naroff, president of consulting firm Naroff Economic Advisors Inc.
That is the simple and inescapable truth. (See: Weak job and wage growth hobbles housing)
Federal Reserve policy makers have expressed frustration about the housing sector’s lackluster recovery. “While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing,” Fed Chairwoman Janet Yellen said earlier this month in testimony before the Senate. …
The fact that Janet Yellen was disappointed by housing tells me that the federal reserve economists don’t understand how the new mortgage rules changed the market.
“The U.S. housing market is being held back,” Mattamy’s Chief Operating Officer Brian Johnston said. Purchasing a new home is “not as desirable as it used to be, given that so many people got burned by buying a new house” when their investment was decimated in the downturn.
Today’s buyers realize housing is not a good investment. They will not see the same appreciation as the prior generation, so the house will be a burdensome expense rather than a lucrative savings vehicle. Without housing kool aid to motivate buying, people rationally recoil at high prices.
[listing mls=”OC14158937″]
Fantastic news. All financially responsible Americans should reject outrageously high-priced homes. Reject with extreme prejudice.
Even better: don’t become a bank debt slave for 40% of your life. Pay all cash for your residence and buy only what you can afford. Say no to the thirty-year mortgage; free yourself from thirty years of debt and interest slavery.
Evidently, a “just say no” trend is developing….
http://www.advisorperspectives.com/dshort/charts/guest/2014/LR-140725-Fig-1.jpg
Looks like with ‘pendings’ too… just-in (June)DOWN -7.3% YoY.
PHSI in the West (June)DOWN -16.7%
Once again, what’s the value of something as bids vanish?
To me that chart perfectly illustrates the impact of the new mortgage rules. When rising rates lowered the ceiling of affordability in mid 2013, the impact of a ban on affordability products became apparent. In the past, sales wouldn’t have dropped off because lenders would have offered ARMs of all types to close deals.
A builder can offer some greater teaser rate ARM at 2.5% for three years, but they’ll have to qualify the borrower based on their real provable income and using the max fully-indexed rate of that ARM in month 61 of the prospective payments. This pushes the real payment above allowed DTIs (~43% back-end).
I have to wonder what buyers are thinking when they use these kind of financial products. As you noted, it doesn’t help them finance more, and I imagine the lender has loaded the loan with fees and a higher rate to make it more expensive in the long run. Do buyers think making a smaller payment for three years is that beneficial? All they accomplish is to become accustomed to a temporary payment, so then they endure a budget shock in three years when the teaser rate runs out.
Is that what happened to people that got a 3 year ARM in 2011? Did their rates shoot up as you predicted?
Not yet. The same could be said of anyone who got an ARM from 1983 to present. While interest rates are dropping, the risk of ARMs doesn’t materialize, but when rates go up, they are shocked. Fixed rates have the same features as ARMs because borrowers can refinance if rates go down, but they have protection against rising payments when rates go up. I think 30 years of falling interest rates has created a false sense of security in using these products.
If you refinance from a fixed rate to another fixed rate over and over for many years, you’ll still be paying a higher rate than the ARM borrower at each step of the way. Plus you’ll be paying frictional costs of at least $3,500 each time you refinance. The lenders, appraisers, escrow agents, title agents, and county recorder’s clerks all need to get paid. There’s no such thing as a no-cost refi. These costs wipe out a substantial portion of the savings unless you hold onto the loan for a long time.
BTW, I never said rates would shoot up. I have pointed out many times that rates are at the bottom of the long-term cycle, and they have nowhere to go but up — and they will go up eventually. Unless you are predicting permanent 3.5% to 4% mortgage rates. Are you?
“In the past, sales wouldn’t have dropped off”
The chart that el O posted shows that sales haven’t dropped off. We are flat with the prior year at 0% YoY change. It could go negative soon, but it hasn’t yet. Sorry, but facts are stubborn. 😉
What are you talking about? Sales volumes for both resale and new homes are down YoY.
Indeed, they ARE down YoY as noted. Plain as day, and he knows it.
The astute observations tally on this page is currently sitting @31. Should only be 30.
Sorry Amigo, but you need to go back to school. Somebody that day trades for a living should be able to read a basic chart.
el O posted a YoY percentage change chart, not a trend chart. It would appear that both you and el O don’t know how to read it. Look at the left axis that shows a 0% change from the prior year.
Any idea why Case Shiller is showing such dramatic YOY sales pair count increases the last 3 months? For March, April and May, sales are up +29, +32, and +21% from 2013. Is this an error?
They exclude distressed transactions because they are not arm’s length, which means a higher proportion of 2013 sales would have been excluded. Now, with distressed sales making up a smaller percentage of overall sales, it’s artificially increasing the number of sales being counted in the C/S index.
Makes sense. Thanks!
From the below chart, it looks like this effect will diminish over the next year since equity sales are now above 90%. The left part of the graph is particularly interesting: Only 30% equity sales in Jan09?
http://www.car.org/3550/pdf/econpdfs/ShareOfEquitySales_-_June2014.pdf
So, by excluding foreclosure sales during a correction, C/S masks the true extent of the downturn. Both the quantity of desperate sellers and the prices they sell at are excluded from index calculations. Which raises the question: The price drops during 2007/8 were regular sales? Wow. Imagine how deep the correction would have been with distressed properties included…
During the recovery, C/S counts foreclosure resales which makes the price and sales gains artificially higher (so the last years run up in prices might not be real). The foreclosure resale price gains are from 1) no longer being distressed, and 2) any rehab performed to put it back on the market (C/S is supposed to correct for improvements, but how exactly?).
I agree with your sentiment, but realistically, it takes too long to save enough to pay cash. Most people don’t have the patience to save 20% for a down payment much less 100%. And since someone saving to pay cash is competing against the financed buyer, they must pay a price inflated by financed buyers enabled by the debt slavers.
Plus, the mortgage interest deduction is so favorable (especially for high earners who already exceed the standard deduction) that paying cash right now would make no sense, even if one could afford it.
My interest rate on the home I purchased in 2012 is 3.25%. My “real” interest rate (factoring in my tax savings each year) is closer to 2%. Even though I could have put more than 20% down, there was no reason to tie up so much capital in my home, especially when I was basically borrowing “free” money from the bank.
That’s exactly what the federal reserve wanted. They made the deal so compelling that even at the inflated price, it was hard to say no.
As was mentioned before… there are only 2 sides of every
home saletrade. 1 winner, and 1 loser.While recent (QE era) buyers focus on the supposed “free money” aspect/meme that’s been fed to them over the last few years… on the flip side, they’re being locked into a higher cost basis for an extended period, so it’s quite clear which side of the trade most will end-up on.
“borrowing free money from the bank” ?? LOL! Good one!
If the money was truely free, why does a huge bureacracy need to continue to pay people to buy a home?
You are asking a macro economic question, which is not of concern to most buyers. On a micro economic basis, the mortgage interest deduction can often push a marginal purchase into an economically sound one.
The return of the Pease phase-down in 2013 complicates this math slightly for higher earners.
To the mortgage industry banning affordability products to prevent recurring housing bubbles is an evil to be opposed because it hurts overall loan volume. This is exactly the kind of short-sighted lobbying that leads to short-term gains and long-term crashes.
Bank of America Merrill Lynch concludes Dodd-Frank killed housing
Two analysts at Bank of America Merrill Lynch are celebrating the 4-year anniversary of Dodd-Frank, the financial reform law, by calling it “persistent financial repression.”
Analysts Chris Flanagan and Adam Katz joined a chorus of voices using the birthday opportunity to express displeasure of the legislation and disdain in the inability to effect more meaningful reform — that is one that promotes more responsible mortgage lending.
“In testimony to Congress on QRM this week, Mr. Frank noted changing the US residential mortgage market was foremost among the very purpose of the statute,” said Flanagan and Katz.
And change that market it did — by sucking the life out of it.
“We think persistently low mortgage application volumes and this week’s extremely weak new home sales report for June and May are natural outcomes of the legislation,” the analysts write, adding they don’t expect the next four years to be very different.
“Given that Dodd-Frank is the law, we see little reason to anticipate meaningful change in the mortgage production or housing environment of the past four years,” they said. “We also see the statute’s regulatory expansion as a dimension of persistent financial repression, which also includes abnormally low nominal interest rates.”
Their analysis is correct, but this new normal is a necessary adjustment to get to a stable housing market.
The banks can make any type of loan they want they just can’t get a government guarantee on it. What I read from this is the banks are completely untrustworthy. They don’t want to risk their own money they want to risk the tax payers.
Yes, that is exactly right. If there were to loan out their money without a guarantee, they would want to charge a lot more to compensate them for the risk.
I’d phrase this differently – “Banks can make most types of loans, they just have to determine the appropriate rate and fees to charge to compensate them for the litigation risk.”
IMO, this will be an example of the sum being worth less than the parts. Trulia and Zillow as competitors drove innovation and improvement in the user interface and user experience. Combining these companies will eliminate the competitive push to innovate. This will open the door for other competitors.
It’s official: Zillow owns Trulia
Zillow (Z) today announced that it has entered into a definitive agreement to acquire Trulia (TRLA) for $3.5 billion in a stock-for-stock transaction.
The two companies will remain separate entities, though real estate agents will be able to advertize on both sites and gain access to combined tech efforts, the company’s CEOs said this morning.
Rumors of the deal first surfaced last week.
Together, Trulia and Zillow’s 84.6 million unique visitors in May 2014 account for twice the number of unique visitors as the next three real estate websites put together, according to the Beyond Syndication 2014 report from Clareity Consulting.
“Consumers love using Zillow and Trulia to find vital information about homes and connect with the best local real estate professionals,” Zillow CEO Spencer Rascoff said. “Both companies have been enormously successful in creating compelling consumer brands and deep industry partnerships, but it’s still early days in the world of real estate advertising on mobile and Web.”
During a conference call on the deal, Rascoff said the real ad potential for the two companies is working to move real estate marketing from offline to online.
“Better agents make for better advertisers,” he said, adding agents still spend on mailers and billboards, but the mobile revolution will likely drive them to either Zillow, Trulia or both.
Both Zillow and Trulia generate the majority of their revenue through advertising sales to real estate professionals.
It isn’t just a decline in new home sales being reported this morning:
Contracts to buy previously-owned U.S. homes unexpectedly fell in June, casting a cloud over the housing market recovery.
http://www.reuters.com/article/2014/07/28/us-usa-economy-housing-idUSKBN0FX19C20140728
The percentage of properties on the market with a price cut is going up exponentially.
If they don’t start lowering credit requirements for new mortgages soon, the party may be over. It looks like we don’t need to wait for rates to rise for the next leg down to arrive.
Unexpectedly? I thought economists were supposed to predict and expect these things.
Oh, really? This is true based on the word of a few Pollyanna economists and the NAr?
[…] New home sales plummet in June 2014 Once financing crosses the Ponzi threshold of interest-only loans, the market destabilizes, mortgage defaults accelerate, and a credit crunch becomes imminent; it's only a matter of time before lenders realize their folly and abruptly stop making bad … Read more on OC Housing News (blog) […]
There is no end to the spin. Over the week-end I saw a headline in my town’s newspaper, “Lack of Supply Hurting New Home Sales.” Wait a second…if lack of supply was the issue, wouldn’t the price of existing homes be increasing? In fact it should be skyrocketing up if there is limited supply of new homes…but it’s not.
That kind of thoughtless spin probably originated at the NAr.
Housing labor shortage turning more severe, boosting home prices
http://www.latimes.com/business/realestate/la-fi-lew-20140727-story.html
My personal experience tells me that there are a lot more jobs than labor right now. We are looking to remodel a small 3/4 bath. We got three quotes. $9,500-$16,000.
For the $16,000 quote, the contractor was going to “install” a fiberglass shower over the existing tile without demo. What the hell? Contractors must not be hurting too badly to price themselves out of a job.
Looks like DIY again. That’s ok. I do better work than most of the “professionals” I’ve hired anyway. And I don’t have to put up with their excuses and bs when they don’t want to take the time to do it right.
I have had some pros that really are, but, they are usually so booked you can’t get them when you need them. Oh, and apparently they went to medical school to learn to install a toilet. Or so I gather from their rates…
The labor shortage they speak of is in the construction trades, jobs that don’t pay very much. With the long-term near death of construction, laborers have moved on to other lines of work, so there is a shortage. The skilled labor of land development, architecture, engineering, and other high-paying jobs still have a glut of unemployed workers waiting for the industry to recover. I suspect about 1/3 of those jobs are never coming back.
Supply and demand, that’s all it is. I own a cleaning service business. #1 problem is and always has been finding labor, but especially the past couple years. It’s a low-wage unskilled job, naturally. You can only pay people to clean houses so much before the Russ Wetherills of the world will start to complain that the employees must have gone to medical school to clean a toilet. You have to charge so much to make up for the cost of labor (by compensating higher and paying correspondingly higher taxes/insurance premiums). If you do a great job, of course you charge higher rates. When business is overbooked, it’s not necessarily a good thing because growth potential is limited when you only can find so many qualified people willing to work hard. And you turn down and turn off business opportunity by having to quote $16,000 to install a shower without demo.
Yes, I am a licensed architect as well. But I don’t work actively in the industry right now, at least for a profit, that is. I can find many people more willing to pay for house cleaning than I can for house/building design. Sad, but true. Skilled labor is in low demand, and unskilled labor is in high demand. But economically speaking, somewhere along the line, both got out of balance big time.
High home prices are certainly off-putting, but that assumes the prospective home buyers out there are even at that stage anymore. It seems to me that many Americans (the bottom and middle of the labor market pyramid) are pensive and/or insecure about their future employment, which does not contribute to high confidence in taking on a 30 year mortgage obligation. Renting seems to make far more sense to enable maximum working mobility right now.
Meanwhile we have “official reports” making stupid claims that fewer massive layoffs somehow equals increased job security.
[…] fell for another 18 months. Here we are in 2014, and sales volumes have been weak all year, and new home sales took a large and unexpected dip. Are we on the cusp of another market […]
[…] shouldn’t be too surprising the home ownership rate isn’t rising. New home sales are weak, and so are pending home sales, recently slipping 1.1%. Further, new multi-family construction is […]
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[…] New home sales plummet in June 2014, and Owner-occupant sales stall while distressed sales […]