The U.S. economy is showing many signs of recovery. Job growth is steady, the stock market is regularly setting new record highs, and the third-quarter GDP reached its highest growth rate in 11 years …yet the recovery in the housing market stands out as an anomaly.
Good news in the housing market seems always to be immediately followed by bad news. For example, previously-owned home sales hit a one-year high in October at 5.25 million, only to be followed by a seven-month low point of 4.93 million in November. Pending and new home sales have seen similar fluctuations.
Whether these are just noise patterns in a slow recovery, seasonal or weather-related anomalies, or signs of some underlying factors affecting housing market volatility, one thing is clear – the housing market is struggling to find and sustain the necessary momentum for robust growth.
Even with remarkably low interest rates – still well below 4% for the average fixed rate 30-year mortgage – housing has not fully recovered from the 2008 crisis. Not all analysts agree on the reasons why, but here are some commonly cited ones.
- Tight Credit – Reforms from the housing crisis (such as the Dodd-Frank legislation) have put banks on a tighter leash and left them more reluctant to approve loans – perhaps more so than the legislators anticipated.
Banks fear another round of forced buybacks of defaulted loans, and many have raised lending standards beyond government minimums. As of November 1st, 56% of mortgage loans in 2014 have been given to borrowers with credit scores above 740 while only 2% were given to borrowers below 640. This compares to 51%/5% in 2011 and 44%/15% in 2008.
The Federal Housing Finance Agency (FHFA) is attempting to work with banks to loosen credit, and has recently reintroduced FHA loans with 3% down payment to entice new buyers. Even with these actions, credit is likely to remain tight in the near future.
- Low Inventory – Housing inventory is down, with an inventory below a three-month supply in many markets including Denver, Boston, Seattle, and Dallas. (A six-month inventory is considered a normal baseline). The overall inventory dropped 9.9% from October to November.
Inventory may also be mismatched in some markets. With a limited number of new homebuyers and people struggling to find (and afford) adequate starter homes, it creates a backlog.Some current homeowners may want to sell and upgrade their home, and they may qualify for loans to do so, but they cannot sell their current homes to get the funds they need to upgrade.
That line of reasoning leads us to the next potential cause.
- Flat Wages – Wages are still stubbornly flat across America, and it is possible that people who can afford to buy starter homes have already done so. Flat wages increase the difficulties in saving up sufficient down payment money, and tight credit compounds the problem for lower-income buyers.
If this is true, FHFA actions are likely to have little effect unless subprime or 0% down mortgages reappear – which is likely to put us back in the same housing mess as before.
Unfortunately, it will just take time for lower unemployment numbers to force wages to sufficiently rise in the middle class. The minimum wage increases set to take effect in many areas are helpful, but they are not likely to spur housing growth.
The above signs point to another fitful, rocky housing market in 2015, with slow growth compounded by a likely interest rate increase later in the year. However, continued good news with job creation should set the stage for a better 2016.