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Why It's Been a Letdown Year in the Housing Market

JUN 16, 2014 12:52pm ET
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Halfway into 2014, the housing market is falling well short of the bullish predictions economists and other pundits made at the beginning of the year.

Reasons for the lackluster performance range from the long, severe winter to rising home prices (which put mortgage payments out of reach for some buyers) to tight credit. All of which is compounded by sluggish economic and income growth as well as changing demographics and attitudes toward homeownership.

For instance, 85% of Millennials would like to own a home someday but they have no qualms about renting, according to Hart Research Associates. A Hart survey found that 53% of these potential first-time buyers (20 to 34 years old) believe renting has become more appealing in recent years. And 54% of Millennials who own a home would consider renting again, compared to 34% of current owners over age 34. 

Millennials also report that it is difficult to find quality homes in their communities that they can afford.

Separately, real estate agents are reporting that lenders are handing out a good number of pre-approved mortgage letters. But the would-be buyers can't find a house to bid on due to a shortage of homes for sale.

Home Sales

Sales were so bad this winter that the National Association of Realtors expects existing home sales could actually decline this year for the first time in four years.

The second half should be better than the first half, according to the Realtors' chief economist, Lawrence Yun. "With continuing job gains, and some increases in inventory, more buyers will start to formally apply for a mortgage and make an offer on a home," he says. But right now, the trade group estimates existing home sales could slip 3.2% this year from 5.1 million in 2013.

Homebuilders also took it on the chin this winter. National Association of Home Builders chief economist David Crowe has revised his 2014 sales forecast downward. But he still expects new home sales to hit 515,000 by yearend, up 20% from last year.

"The slowdown was longer than the winter due to consumer reluctance," Crowe says. Economic signals "chilled homebuyers" who worry about job security and personal income.

In addition, potential homebuyers are having problems selling their homes, due in large part to the low number of first-time buyers. It seems to be circular problem that keeps would-be first-timers in apartments and repeat buyers with a "For Sale" sign in their front yard.

Builders are catering mainly to repeat or move-up buyers because they can qualify for a mortgage or pay cash. These middle-age buyers have accumulated wealth. Their incomes have grown over the past several years, while the younger generation's has not. Builders estimate that first-time buyers account for just 16% of their sales. In April, such buyers were responsible for just 29% of existing home sales.

Crowe sees the economy picking up and home sales accelerating in the second quarter and through the second half of the year. If jobs continue to increase at a rate of 200,000 per month, more buyers will enter the market, he says. "I'm not counting on the first time homebuyer. It is the repeat buyer that will lead the charge."

The pullback in sales over the winter prompted Robert Mellman, an economist at JPMorgan Chase, to take a deep look at household formation, which is barely growing.

He discovered that population growth in the typical home buying age group (20 to 54 years) was just 0.2% per year over the last three years, compared to 0.7% for the entire population. 

"The slow growth of this key demographic group would be a negative for the single-family housing market even if household formation were not running unusually low relative to population growth," Mellman wrote in a note to clients last month.

He also discovered that the share of households with children is declining. "The outright decline in the number of households with three or more people over the past few years is a huge negative for the market for single family homes," he wrote.

The housing market is "still reeling" from the jump in interest rates during the spring of 2013 and the run-up in house prices, Economists at Wells Fargo Securities wrote in a June 11 report.

"The effect on housing demand has been chilling, particularly in the new home market, where a 70 basis point rise in mortgage rates, coupled with a 6.2% increase in prices, has resulted in a 17% jump in monthly principal and interest payments."

The economists, Mark Vitner and Anika Khan, also blame anemic income growth and "exceptionally" tight credit for the slowdown in home sales.

"Now it appears that we will need stronger economic growth in order to produce the buying power necessary to get the housing recovery going," they write. But stronger growth could push interest rates higher and push potential buyers out of the market, the economists warn. "Either way the road to recovery looks more difficult."

Vitner and Khan see new home sales climbing to 465,000 by yearend, up 8.4% from 2013. Last December, they expected 2014 new home sales would jump to 530,000.

Income growth, not jobs, will be the key to a better housing market, says Fannie Mae chief economist Doug Duncan.

"The steady, yet unspectacular, jobs trend isn't expected to be a game changer for the housing market, which needs a boost in consumer confidence—something that we believe is unlikely to occur in the absence of stronger income growth," Duncan said in response to the latest jobs report. The Bureau of Labor Statistics reported that 217,000 jobs were created in May. It was the fourth straight month that the bureau reported 200,000 plus job growth.

Related:

'Actual' Home Sales Strong in Major Metropolitan Markets: Re/Max

Bank Economists See Strong Growth, Lagging Housing Market

Builders Root for Watt to Loosen GSE Credit Guidelines

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