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Friday, April 4, 2014

Stagflation in the Housing Market

The Associated Press (via Yahoo News) reports:
Entering the 2014 spring buying season, the U.S. housing market faces an unusual dilemma: Too few people are selling homes. Yet too few buyers can afford the homes that are for sale.

"Both sides of the equation are in a funk," said Glenn Kelman, CEO of the real estate brokerage Redfin.

A 13.4 percent jump in the average price of a home sold last year, according to the Standard & Poor's/Case-Shiller 20-city index, hasn't managed to coax more homeowners to sell. And combined with higher mortgage rates, higher prices have made homes costlier for first-time buyers as well as for all-cash investors.

Average prices nationally are expected to rise by single digits this year. The gains could be strongest in areas with solid job growth, such as Seattle and Austin, Texas. And while construction will put more homes on the market, lack of affordability could keep sales flat to falling.
The article lists various reasons for fewer homes on the market, but a significant one is that many home owners are underwater on their mortgage:
... This time, fewer homes are being listed because 19 percent of owners are underwater on their mortgages — meaning the sales price wouldn't be enough to repay their loan.

Still, warmer weather, job growth and a strengthening economy are expected to encourage more listings this spring.

... But around the country, many homeowners are still reluctant to sell because they would likely lose money on the deal. The 2007 housing bust still haunts the market.

About 19 percent of homeowners owe more on their mortgages than their properties would sell for, according to the online real estate database Zillow. An additional 37 percent are "effectively underwater": Their sale profit would be too low to cover the cost of listing their home and putting a down payment on a new property.

Still, each mortgage payment repairs some of the damage and improves a homeowner's equity. As home values grow further, more people will start to put their homes up for sale, and the supply should rise.
One thing not mentioned in the article which I suspect is significant are the actions--or more correctly, lack of action--by the banks. With the number of homes lost to foreclosure or simply abandoned to the mortgage holders, simple economics would have predicted a large number of homes entering the market. This would have depressed prices, but also increased demand. For the most part, this hasn't happened, and the primary reason seems to be that banks are perfectly happy to sit on the homes. Although anecdotal, I see many homes even in my neighborhood and surrounding area, that have obviously been repossessed, but are not being sold (although they are being maintained).

The article goes on to also indicate that there are a low-number of first time buyers:
... After the Great Recession officially ended in mid-2009, many economists predicted that pent-up demand for homes would drive sales in the years to come. Not exactly. Nearly five years into the recovery, buying remains subpar.

Sales of existing homes are projected to total 5 million this year, according to the National Association of Realtors. That's about 100,000 fewer than last year and far below the 5.5 million associated with healthy markets.

Much of that shortfall can be summed up simply: Too few first-time buyers. They bought about 1.5 million homes last year, about 500,000 fewer on average than they would have typically.

Last year's price increases makes affordability a growing obstacle for first-timers, said Jed Kolko, chief economist for the online real estate firm Trulia. Unlike current owners whose down payments come from selling a previous home, first-timers must amass a down payment. And higher home prices require more cash up front.
Due to changing demographics, first time buyers are going to continue to decline. We are through the baby-boom and their children. Each succeeding cohort will be smaller. Moreover, declines in family size and marriage rates will also drive down demand for homes, especially in regions of the country where population and economic growth is stagnant.

The article concludes by noting that sales of high-end homes are doing well. This is just a general reflection of the overall economy--top wage earners have recovered from the Great Recession, while middle and lower-income wage earners are, at best, seeing incomes stagnate, or actually decline. Thus, the current housing market is yet another example of stagflation.

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