U.S. housing suffered a massive crash in 2008. Since 2009, we were supposed to have a housing recovery.
Yes, prices and sales have rebounded across the board and excess inventory has been worked off. However, looking at the recovery in detail, it looks more like the broad economy: Patchy, exclusive, and not very sustainable.
After hitting a high in August 2013, total existing home sales declined over the winter, despite ample seasonal adjustment, rebounded over the summer, and declined precipitously this August.
Million Dollar Home
Sales are down 5.3 percent year over year in total, but there is more to it than meets the eye.
Sales of cheap houses worth less than $100,000 crashed 15.9 percent, suggesting that the lower middle class and less privileged people are not participating in this recovery.
All other categories declined as well, apart from one exception: Homes for the very well off and worth more than $1 million registered a 2.7 percent uptick in transactions.
Why? Financial investors buying multiunit houses and rich people from overseas have been flocking to U.S. residential real estate thanks to easy money from the Fed. Some search rental yield (investors), others a way to move away from risky economies (Chinese oligarchs).
Not Family Friendly
On the other side of that trade are a greater number of ordinary Americans who have become renters. The home ownership rate fell to 64.7 percent through the middle of this year, down from a peak of 69.2 percent toward the end of 2004, according to the Census Bureau.
In fact, the staple home for the American family, the single new privately owned unit, has been stagnant since 2010 and remains near the bottom of activity. Yes, everybody benefits from Fed engineered low mortgage rates, but retail investors are at a disadvantage compared to rich Asians or financial investors.
That’s because ordinary people need income to support mortgage payments but wages have lagged economic growth.
A relatively simple metric, total mortgage debt to wages and salaries still stands at 130 percent, double the historic average and 35 points higher than in 2001. Also, prices are still expensive compared to the ‘90s. The S&P/Case-Shiller 10-City composite index is down 20 percent from its peak in 2006 but still 130 percent higher than in 2000.
In addition, there are still almost 10 million homeowners whose mortgages are worth more than the price of the property. They can’t sell or buy, explaining the low number of transactions in the cheaper categories.
Real Sentiment
Although the chronically biased sentiment index from the National Association of Home Builders (a commercial operation) rose to its highest reading since 2005 (not long before the bubble popped last time), consumers are less optimistic.
A good 64 percent of respondents of a recent Fannie Mae survey said now is a good time to buy a home. However, that was the lowest reading on record and a full 38 percent said it is a good time to sell.
More importantly, 50 percent of respondents said mortgage rates will go up over the next 12 months. With the Fed effectively ending its unprecedented manipulation of the mortgage market, they are on to something.
Rising rates are good if they are a result of economic strength. In this case, however, it is merely the Fed taking away the punch bowl.
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