Housing Mammoth Stuck in Tar Has Bigger Problems To Worry About
A recent comment by the Chief economist of the NAR that housing is "stuck " reflects his concern that the low inventory of homes for sale is holding sales and the housing recovery from gaining traction. But Mr Yun is focusing on the near term problem facing housing, which is a shortage of on sale inventory, while failing to consider the real dangers lurking just beyond the present.
Perhaps Mr Yun would do well to take a visit to La Brea Tar Pits, and there consider the plight of ancient Wooly Mammoths. Some of those were stuck in the mire too, but though the tar was a contributing cause, ultimately, what delivered their fatal blows. In some cases It took the Saber Tooth Tiger, and sometimes packs of Dire Wolves to do that, sometimes both at once.
So what of our housing market? Prices are on the upswing, in some markets demand outstrips supply to the point that multiple offers are not uncommon. If housing can “unstick“ itself with an increased inventory, then what could possibly go wrong? What are the saber tooth tiger, and dire wolves of housing?
They are these:
1. Housing Price Inflation without income growth: When prices of homes rise faster than incomes, buyers become priced out of the market. While home prices, year over year, are on the rise, average incomes are not keeping pace. This is not a good thing long term trend. Cash buyers are currently 30% of the market, and cash buyers have no debt to income problems. These buyers are helping price some primary mortgage home buyers out of the market.
2. Demand light from first time uyers: Even with historically low interest rates hovering in the 3.25- 3.75% range, we are hearing cries that mortgage lending is too tight, and that would be first time buyers are having trouble qualifying for a loan. Even in 2013, first time home buyers are running at a 30% level, lower than the historical norms of 40-43%. What happens when interest rates rise (as they inevitably will do) ? Unless we see good income growth, those that can't qualify now will have a much harder time qualifying higher mortgage rates.
3. Mini-Bubble 2.0: The main reason home prices are rising at current pace is that on-sale inventory is so low. There continue to be problematic numbers of homes underwater, many Americans in the 90-99 LTV range, which means these homeowners will not be putting their homes into the for sale inventory. Further, there has been a big drop in home construction in the last 5 years and even though that number is getting better each year. We simply aren't building homes fast enough to make a dent into inventory. Finally properties in distress take a long time to get to market and we have still have roughly 5 million homes that are either delinquent or in the foreclosure process. So long as these factors exist, then there remains the possibility that the few properties there are, are being inflated to unrealistic levels, and that mini bubble in prices will get bigger.
It would be wonderful if the good news being reported by many is actually good long term news as well. But, in my view, the recent rise in home prices , without the corresponding increase in real incomes, and new home purchase mortgage applications being approved, then the truth seems to be more like the truth for our fateful Wooly Mammoth. Sometimes, the initial problem, becomes insignificant, though contributory, to the much worse problems to come.
Logan Mohtashami is a senior loan mananger at AMC Lending Group which has been providing mortgage services to California residents since 1988