Housing Shortage Continues

The Mortgage Corner

Existing-home sales increased in October to their strongest pace since earlier this summer, but continual supply shortages led to fewer closings on an annual basis for the second straight month, according to the National Association of Realtors.

There just are not enough homes to satisfy the surging demand for housing in a fully employed economy with wages and household incomes rising substantially for the first time since the Great Recession. Part of the reason for higher demand—the Gen Y-er, millennial generation now wants their own living space.

Graph: Econoday

Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 2.0 percent to a seasonally adjusted annual rate of 5.48 million in October from a downwardly revised 5.37 million in September. After last month's increase, sales are at their strongest pace since June (5.51 million), but still remain 0.9 percent below a year ago.

Lawrence Yun, NAR chief economist, says sales activity in October picked up for the second straight month, with increases in all four major regions. "Job growth in most of the country continues to carry on at a robust level and is starting to slowly push up wages, which is in turn giving households added assurance that now is a good time to buy a home," he said. "While the housing market gained a little more momentum last month, sales are still below year ago levels because low inventory is limiting choices for prospective buyers and keeping price growth elevated."

Why has it taken so long for the housing market to recover, as I said last week? Fewer new households are being formed that would require a home of their own

A 2016 San Francisco Fed study by economist Fred Furlong on household formation concluded that many young adults chose alternative residential choices such as living with parents, other relatives, or friends, until now, as I noted.

“But there are signs that a readjustment is imminent,” said Furlong. “The current population share of young adults is fairly close to the share that existed at the start of the most recent housing boom. Also, while more young people are living with their parents, they are forming their own households, albeit later in life, leading to higher headship rates over time. Mr. Furlong notes that U.S. Census Bureau projections suggest that household formations will average about 1.5 million per year through 2020, which is much better than the 900,000 annual averages of the last 5 years.”

It will be the largest jump in household formation since the Great Recession, which means many more homes will have to be built to satisfy the demand, when there is already a labor shortage in the construction industry.

This is while total housing inventory at the end of October actually decreased 3.2 percent to 1.80 million existing homes available for sale, and is now 10.4 percent lower than a year ago (2.01 million) and has fallen year-over-year for 29 consecutive months, said NAR. Unsold inventory is at a 3.9-month supply at the current sales pace, which is down from 4.4 months a year ago.

Better news is that nationwide housing starts rose 13.7 percent in October to a seasonally adjusted annual rate of 1.29 million units the highest housing production reading since October 2016, when total starts hit a post-recession high of 1.33 million.

So what needs to be done to increase housing inventories? Marketwatch’s Andrea Riquier says we need double the construction workers we now have to boost construction—another 750,000, at least, enough to meet the surging demand from the millennial generation. They are the 18 to 34 year-olds—now the largest buyer group, comprising 42 percent of homebuyers, according to a September study by the Zillow Group.

The housing shortage is also exacerbated by many existing homes being kept off the market—Marketwatch estimates some 300,000—by investors that scooped up bargains from the housing bubble bust, and continue to rent them out.

Harlan Green © 2017

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Consumers On the Rebound

Popular Economics Weekly

Maybe it’s Spring? Consumers must be feeling better, since they are able to pay down their debt load, while spending more. Personal consumption and even pending real estate sales are up in May-June, while mortgage delinquencies continue to fall.

Mortgage delinquency rates peaked at 10.97 percent in December 2009, and have been falling steadily since, though foreclosures have not been declining. That’s because lenders are every so slowly working through their backlog of seriously delinquent mortgages—those more than 6 months in arrears. Both delinquencies and foreclosure levels are still far above the historical rates of 4 percent and 1 percent of all mortgages, respectively.

According to Lenders Processing Services (LPS), 7.96 percent of mortgages were delinquent in May, down slightly from 7.97 percent in April. LPS also reports that 4.11 percent of mortgages were in the foreclosure process, down from 4.14 percent in April. This gives a total of 12.07 percent that are delinquent or in foreclosure.

The Pending Home Sales Index put out by the National Association of Realtors, a forward-looking indicator based on contract signings, rose 8.2 percent to 88.8 in May and is 13.4 percent higher than in May 2010. The data reflects contracts but not closings, which normally occur with a lag time of one or two months.

“Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace,” said NAR chief economist Lawrence Yun. “Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle.”

Consumers also continue to shop. Retail sales on a year-ago basis in May came in at 7.7 percent, compared to 7.3 percent the month before.  Excluding motor vehicles, sales increased a huge 8.2 percent, up from 6.8 percent a year ago in April.

When will businesses begin to spend their cash hoard? Only when so-called effective demand picks up, and that won’t happen until more debt is paid down. All household debt including mortgages still totals more than 100 percent of household assets. That is why demand is still relatively weak across the board, whether for durable goods (that last more than 3 years), or services. This means incomes have to substantially increase as well.

The good news is that increases in durable goods orders for the latest month were broad-based by industry.  Transportation led the way with a monthly 5.8 percent jump, following a 9.4 percent drop in April.  The swing in both months was largely nondefense aircraft (Boeing) which surged 36.5 percent in May after a 29.0 percent fall the month before.  Defense aircraft rebounded 5.5 percent after a 0.4 percent dip.  However, the auto industry appears to still be suffering from supply shortages.  Motor vehicles edged up only 0.6 percent, following a 5.3 percent fall in April.

Household net worth, the best measure of financial health, is also improving, as we said last week. It is at 370 percent, above the long term average of 350 percent, according to the Federal Reserve’s latest Flow of Funds report, while the personal savings rate is hovering around 5 percent, meaning that consumers are saving enough to continue to pay down their debts.

The Federal Reserve Bank of San Francisco also believes that corporations won’t open their pocketbooks until household debt levels decline further. “If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth,” said a recent SFFRB report. “The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.”

One would think higher corporate profits should mean corporations will eventually have to hire more workers, if they want to stimulate future demand for their products and services. Higher profits also mean a lower price-to-earnings ratio for stock values (earnings being the denominator in the P/E ratio), which has been hovering around 15:1 for the S&P 500 largest corporations of late. And a P/E ratio below 15:1 has historically boosted stock prices. So this new report should give a boost to stock prices for the rest of the year, but what will corporations do with the proceeds, other than using it for stock buybacks and cash bonuses to its executives? Creating more jobs is another story.

Harlan Green © 2011