Worrying Housing Market Signs
Real estate is a mosaic of illiquid local markets rather than a efficient national market, so it is a little misleading to talk about the 'housing market' nationally.
Despite the heterogeneity, certain macro conditions can suggest, on average, housing's future. Below is a recap of issues facing both the demand and supply halves of the housing market.
In short: the news is not good. On average, housing faces significant headwinds, perhaps for a generation.
Jobs, Jobs, Jobs
Most obviously, before someone can buy a property, they need to be able to afford it. Sure, after years of post-bubble credit tightening, some lenders are making it easier to qualify for loans. And mortgage rates remain at very low levels.
But cheap credit doesn't make housing affordable unless home prices are within reach of workers. So the first big indicator is the strength of the job market.
Nationally, the job market remains weak. Not only do people have a hard time finding jobs, but many of those that are available don't pay well, as Business Insider recently determined. Until the economy picks up, affordability will remain a big issue.
Historically the Fed could juice the housing market by lowering long term rates. The lower rates would increase affordability and spur home building. Home building creates jobs with decent wages, fueling home buying demand. Through this cycle, housing would help heal a tough economy.
This time, rates have been incredibly low for several years; low enough to spur a big refinance boom and have it peter out. New construction remains anemic.
According to the Census Bureau, only 569,000 new single family housing units were completed in 2013. The average from 1966 through 2007 was nearly double that, 1,108. Against the post bubble (2008-13) average of 555,000 completed single family units 2013 looks good, but it's clear new construction jobs are not going to drive economic recovery.
Would Be First Time Buyers Face Student Debt, Wall Street Buying Spree
Young families have traditionally been a major component of first time homebuyers. Increasingly, however, homes are not affordable for this cohort.
Many would-be first time homebuyers are facing mortgage-like student loan debt service. As the Washington Post reported, student debt tripled over the past decade, while salaries for college graduates have fallen.
In addition, Wall Street hedge funds and others have been massively buying foreclosures and other houses in the starter home market. These purchases have been concentrated in some locations. Where concentrated, investor buying has fueled price spikes, placing properties out of the reach of some potential home buyers.
Some on Wall Street are now expanding to buy delinquent mortgages to gain control of the homes.
These pressures add up to a discouraging national view: first-time homebuyers were only 26 percent of the market in January 2014; normally the percentage is around 40 percent.
Bubble Overhang: Foreclosed Owners, Underwater Owners
Finally (on the demand side), the wreckage of the housing bubble still surpresses demand. Foreclosed homeowners, who would normally be drivers of move-up purchases if they had been able to stay in their homes, are now (mostly) excluded from the market.
Not only would the previous foreclosure make getting a mortgage very difficult, but it also means the loss of the down payment and very frequently most or all savings of any other kind, as homeowers in trouble typically liquidate whatever they can to keep their homes.
Less visible are the trapped homeowners, the people underwater on their mortgages.According to a recent Associated Press story, fully 56 percent of mortgages are underwater or effectively underwater.
Underwater means the sale price won't cover the mortgage; effectively underwater means the sale price won't cover the mortgage, realtor commission and down payment for the next house. Thus while an effectively underwater homeowner could sell, she can't buy.
Even though the housing market looks superficially tight, with less than six months of inventory on the market, large numbers of houses sit just off market. This hidden supply will distort the market until it all clears.
One source of hidden supply is the "shadow inventory", which CoreLogic calculates as 1.7 million homes as of January, 2014. Given that nationally, 2.0 million existing homes were for sale in February 2014 according to the National Association of Realtors, that's a significant amount of inventory.
Shadow inventory includes foreclosed homes the banks have not yet listed for sale, homes in the foreclosure process, and homes with seriously delinquent mortgages. Like Wall Street's buying spree, shadow inventory is heavily concentrated in several markets.
Another source of hidden supply are the underwater and effectively underwater owners who would sell (and buy) if they could afford to.
A final source of hidden supply is Wall Street: a lot of its investment buying could turn into investment dumping, if properties don't rent well and prices don't recover enough to sell well.
Bottom line: Vibrant local economies can fuel locally healthy housing markets, but the poor job market, massive student debt, and major damage remaining from the housing bust will prevent housing nationally from regaining its mojo.
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