Housing Market Is Recovering

The Mortgage Corner

FRED

The just-released single-family sales graph highlights a very important fact. New-home sales—especially for single-family residences—are back to historical levels last seen in 2000. The Great Recession and oversupply during the housing bubble caused so much damage to home building that it has taken housing 10 years to recover.

This augers well for economic growth this year with a fully-employed economy and more younger homebuyers entering he housing market. So the question being asked is, has the home-ownership rate finally bottomed, so that it is now again on an upward trend?

Sales of new single-family homes in December were at an annual rate of 694,000, which is 23 percent above the December 2018 rate, reports HUD and the U.S. Census Bureau. Builders are finally catching up to the demand for more homes, in other words.

There are many reasons the housing recovery has taken so long—there are too few homes in the affordable range, for starters. Entry-level homebuyers (usually from the millennial generation) have been slow to form new households and pay down their college debts, so they are currently buying just 30-31 percent of existing homes, when their percentage has been closer to 40 percent in the past.

Builder confidence in the market for newly-built single-family homes has also increased five points to 76 in December off an upwardly revised November reading, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since June of 1999.

“Builders are continuing to see the housing rebound that began in the spring,” said the NAHB, “supported by a low supply of existing homes, low mortgage rates and a strong labor market. While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still underbuilding due to supply-side constraints like labor and land availability. Higher development costs are hurting affordability and dampening more robust construction growth.”

The average rate of new home sales in 2019 was 681,000, which was 10.3 percent higher than 2018’s pace. The median sales price for new homes was $331,400 in December, which was up from the previous month. The government estimated there was a 5.7-month supply of new homes available for sale, up slightly from November as well, and is now back to the average supply of new homes on the market before the housing bubble.

Calculated Risk

Calculated Risk’s Bill McBride has commented on the homeownership rate since the Great Recession, and believes it is also returning to historical levels, per his graph. It is back to 64.1 percent of households, about the average that has prevailed since the 1970s.

There is still a housing shortage, however, with more than 500,000 homeless living on the streets, according to the latest data. This is a sign that not enough affordable, entry-level homes are being built; which means that many of the younger generations will still not be able to afford to buy.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Homeownership Expands Again

The Mortgage Corner

Washington Post

“New data indicate that in 2016, in defiance of myriad prognostications, the decade-long decline in the homeownership rate abruptly reversed. Once-rapid growth in renter households stalled, and the long-stagnant number of owner-led households began rising,” says the Washington Post’s Andrew Van Dam.

The homeownership of American households peaked at the height of the housing bubble at 69 percent, and only now has returned to post-recession levels. This is confirmed by several other indicators, including the big jump in household formation by the millennial generation, children of the baby boomers, in particular, who are now 22 to 38 years of age. It took them this long to buy because of the Great Recession that depressed incomes and huge amount of college debt.

And builders are beginning to realize that fact, as housing starts jumped back to historical levels in January to a 1.230 million annual rate. After falling 28 percent in December, starts in the West jumped 29 percent in January, as California began to recover from the record number of wildfires. The biggest region for home builders is the South where January starts rose 14 percent to more than reverse December's nearly 8 percent decline, which were also weather-related.

Econoday.com

Another reason for the rise in homeownership has to be steadily rising rents since they hit bottom in 2008, and mortgages rates still at almost record lows. “In the middle of 2015, rents nationally rose more than 6 percent from a year earlier — easily their fastest growth since the real estate data experts at Zillow began keeping track. It is one of the few times on record that rents rose faster than home prices,” said Van Dam.

The last piece of the housing puzzle is the moderation of housing prices that no longer rise at 5 percent per year. The Case-Shiller same-home index year-on-year prices were up only 4.2 percent in the month which missed expectations by a very sharp 6 tenths. This is the lowest growth rate since November 2014 and compares with FHFA's 5.6 percent rate for December which was a 3-year low.

The surge in new households, as well as record low mortgage rates, have helped new-home sales as well. New home sales jumped 3.7 percent in December to a 621,000 annual rate that is on the high end of expectations, though December's year-on-year rate is still minus 2.4 percent.

We therefore see a steady improvement for home sales in 2019, since I predict interest rates could stay this low for the foreseeable future. Why? Economic growth is slowing, while consumer incomes are rising above inflation rate, and there is still a housing shortage.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New Home Sales-Ownership Rate Rising

The Mortgage Corner

New home sales shot up 19 percent in September to a consensus crushing annualized rate of 667,000. This is the largest percentage gain in 28 years and the highest level of the cycle, since October 2007. In stark contrast, existing home sales, the green line, haven't shown any kind of bounce.

Graph: Econoday

Homeownership is also rising. The Census Bureau last week reported that ownership increased to 63.9 percent in the third quarter, the highest level since 2014. The rate was up from 63.7 percent in the second quarter and 63.5 percent a year earlier. It is creeping up to the 65 percent historical ownership rate, but it remains below the 69 percent clocked at the peak of the housing bubble a decade ago.

What does this mean? Firstly, the housing supply is catching up with demand, and it will take some pressure over rising rents. The rise in homeownership comes as other forces weaken the rental market, including a surge in supply from developers hoping to cash in on rising rents. In September, the seasonally adjusted rate of apartments under construction was 596,000, nearly twice the long-term average of 300,000 units, according to U.S. Census data.

The new housing supply boosted the national vacancy rate to 4.5 percent in the third quarter of this year, compared with 3.5 percent a year earlier, according to John Chang, head of research for real-estate services firm Marcus & Millichap. Nationally, rents were up 3.5 percent between the third quarters of 2016 and ’17, compared with 4.5 percent the previous years, he said.

And it is the millennial generation, children of the baby boomers and the largest generation ever, that are boosting homeownership rates as they begin to marry and raise families. Their marriage rate over the next five years will likely play an important role in demand for apartments and houses, according to Dr. Chang.

The market is not so good for existing-home sales. Econoday reports the red line of pending sales shows the pending index flat at 106.0 and existing homes likely to hold near 5.400 million. Resale prices ($245,100 median) are far lower than new homes ($319,700), but it's not helping sales. It peaked in January and has been trending down ever since.

But if construction and new-home sales continue to pick up, it will move more millennials out of their rentals. They are taking their time to nest, and the oldest of those born from approximately 1980 to 1996 will soon be approaching 40 years of age.

Sales haven’t declined more because mortgage rates are holding @ 3.50 percent for a 30-year fixed conforming loan with 1 origination point, and 3.625 percent for the so-called Hi-balance 30-year conforming rate in high-expense states and regions.

This is actually an incredible number, as interest rates this low in the eighth year of the recovery from the Great Recession attests to the severity of the recession, and fact that household incomes are only beginning to recover.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Who Are the Homeowners?

The Mortgage Corner

The Atlanta Federal Reserve Bank just published a housing study entitled, “It’s Not Just Millennials Who Aren't Buying Homes,” that breaks down homeownership by age and household status. And the results show that age and whether one is head of a household makes a difference.

 

Graph: Atlanta Fed

“In recent years, much attention has been focused on the growing tendency of millennials to rent,” says the Atlanta Fed study. “Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust.”

But in fact the homeownership rate has declined in all age brackets, except 65 + year-olds. Why is not clear. We know household incomes since 1980 have declined for all age brackets except seniors whose incomes are boosted by social security, Medicare, and other retirement benefits.
The study also shows that homeownership rates have actually returned to pre-housing bubble levels of 64 percent, the homeownership rate since the 1970s.

“The fact that the average U.S. homeownership rate is close to rates seen in the mid-1980s and mid-1990s while homeownership rates within age groups (under 65) are currently lower than their respective averages in the mid-1980s to mid-1990s suggests that factors other than age may be affecting the average person's decision to buy or rent.”

I believe it has to be declining household incomes that haven’t yet returned to pre-recession levels, even with record low interest rates. According to the Federal Reserve, the median household income was $51,939 in 2013, below the 1999 peak of around $57,000. The Census Bureau estimated real median household income at $53,657 for 2014 and $54,462 in 2015. Household income varies by race, with Asians the highest in 2014 at over $74,000 and African Americans the lowest around $35,000.

Graph: FRED

So household incomes have a long way to go to return to historic highs. A major reason has to be the soaring inequality that could take decades to correct; if and only if more progressive economic policies can be enacted—such as a wealth tax on large financial assets, and a higher maximum personal tax rate, which hasn’t yet even returned to 1980, Reagan era levels.

The nation’s aggregate household income has substantially shifted from middle-income to upper-income households, driven by the growing size of the upper-income tier and more rapid gains in income at the top. Fully 49 percent of U.S. aggregate income went to upper-income households in 2014, up from 29 percent in 1970. The share accruing to middle-income households was 43 percent in 2014, down substantially from 62 percent in 1970.

The bottom line is that married couple families still have the highest homeownership rate, whereas non-married singles have the lowest rate. What better reason to own a home than raising a family? And millennials are just now entering the age when they are beginning to form their own households, so their homeownership rate may also rise.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen