The
next housing crisis is here. And this time the crisis is all about one
thing: supply.
Following
the mid-aughts housing bubble that saw homeowners across the country get
themselves upside down in homes and mortgages they couldn’t ever afford to
repay — a crisis that was as much about too much supply as it was about too
much bad financing — the market has gone the complete other direction.
First-time
homebuyers are crowded out, with Trulia’s chief economist Ralph McLaughlin
writing Monday that the number of starter homes on the market has declined
43.6% in the past four years.
Homeowners
who want to move from a starter home to something better can’t afford the next
step. McLaughlin notes that the number of “trade-up” homes on the market is
also down about 40% over the same period.
Meanwhile,
mortgage lenders, despite record-low rates, are still reluctant to extend credit
to less-than-superb borrowers.
And as
investors look for places to earn whatever return on capital they can muster,
the low end of the housing market has almost ceased to exist as the investor
class has bought up homes with the plan to flip them.
On Monday,
the latest report on existing-home sales showed the pace of sales in February
fell 7.1% from January’s to an annualized rate of 5.08 million. Compared with
last year, however, the pace of sales is still up 2.2%.
This
report also showed that sales to individual investors — or buyers who intend to
flip the home for a profit — accounted for 18% of existing homes sold in
February, the highest share since April 2014. Almost two-thirds of these buyers
paid cash.
Also in
Monday’s report, commentary from Lawrence Yun, chief economist for the National
Association of Realtors — which publishes the report on existing-home sales —
showed the kind of crisis the housing market is facing.
“The
lull in contract signings in January from the large East Coast blizzard, along
with the slump in the stock market, may have played a role in February’s lack
of closings,” Yun said Monday.
“However,
the main issue continues to be a supply and affordability problem. Finding the
right property at an affordable price is burdening many potential buyers.”
Yun
added (emphasis ours), “The overall demand for buying is still solid entering
the busy spring season, but home prices and rents outpacing wages and anxiety
about the health of the economy are holding back a segment of would-be buyers.”
This
chart from Bank of America Merrill Lynch, which we highlighted earlier this
month, captures the dynamic Yun is talking about here.
In our
latest Most Important Charts collection, Scott Buchta, a fixed-income
strategist at Brean Capital, argued that existing and new-home sales were often
incorrectly conflated as joint indicators on the health of the housing market.
Existing-home
sales, even with Monday’s drop, are still roughly near precrisis levels. This
argues that in a healthy housing market we’re looking at something like 5
million already-built homes being sold in a given year.
New-home
sales, on the other hand, have been a major laggard.
“In our
view, the recovery in existing home sales has been led by rising home prices,
which has brought additional supply into the market,” Buchta said. This view
which is consistent with the increase in investors buying existing homes as
well as the high number of cash-only sales, which accounted for 25% of
transactions in February.
“The
lag in new home sales, on the other hand, is more reflective of the economy as
a whole and has been adversely impacted by sluggish wage growth and tight
credit windows.”
Peter
Tchir, Buchta’s colleague at Brean Capital, also hammered on this idea of
new-home sales as reflecting economic trends that have persisted since the
crisis — slow wage growth, rampant concern about the future, and an underbuilt
low-end housing market have all kept renters renting.
If we
take the view that the jobs being created aren’t that great — which is an
argument for another post — then what we’re going to see is a rising class of
renters.
“These
low paying jobs are not the type of job that are conducive to buying a home,”
Tchir wrote.
“The
first problem is saving for the down payment — a Herculean task in itself. The
second problem, and the one that I think is addressed less frequently, is who
really wants to commit to an area when the job isn’t that good and may not be
stable?”
And if
we consider that the economy is, as much as anything, a confidence game, the
reality is that instability and imminent collapse have been the dominant
psychological themes for both consumers and investors since the crisis.
So we
can hit on the theme that the US economy is not heading for recession time and
time again, but there is a reason Donald Trump is leading in the Republican
polls: People do not believe in this economy.
The
upshot here is that with more folks renting and the labor market recovering
faster than the housing market, we’re suddenly looking at a new class of
well-employed would-be homebuyers relegated to renting … and paying ever
increasing rents.
And
this is likely to manifest itself in more inflation, something we’ve noted has
been a fast-growing trend in the US economy despite the Federal Reserve’s clear
talking-down of this recent move in last week’s policy announcement.
Earlier
this month we highlighted commentary from New River Investments’ Conor Sen, who
said, among other things, that the housing market has simply been underbuilt
following the crisis and is ill prepared to handle the coming wave of
millennial households that will be formed over the next several decades.
Home
prices may increase, and as an investment — not a place to live — buying houses
may still be attractive for some time to come.
But
demand for housing is not going away and will only get stronger.
Millennials
are growing up, and despite all the trend-piece fanfare suggesting otherwise,
will be just like their parents: Millennials will have kids, move to the
suburbs, and want to buy a house.
The
problem is there might not be enough houses, at the right price points, to go
around.
This is
the next crisis.
Original Content The Real Deal
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