The latest figures from the National Association of Realtors show that both buyer and seller traffic declined substantially to start the fall selling season. The assumption was that the mania of 2013 would carry forward and slapping on a faux hardwood floor would suddenly add $50,000 in value to your crap shack. This lipstick on a pig trickery is not getting the mileage it did in 2013 when people were full on delusional about buying housing, even though volume was incredibly low. The current meme that is now floating is one of “well you missed out in 201x to buy and are now priced out!” Ironically these people are not out in the market buying today as you would expect if they truly believed in the mantra that they keep preaching. In this housing market, timing and luck intertwine with speculation. There are many factors to examine including structural, location, opportunity costs, and mobility. There is a clear demand for rental housing and this has pushed rental prices higher although we are also seeing a limit here as well. The NAR reporting on a slow start to the selling season this fall signifies what we already know. There is a standoff going on in the current housing market.
We’ve all heard about the broke Millennials living at home with mom and dad unable to move out into a very expensive rental. For years, we’ve been told that somehow this young group of people would represent some pent up demand to buy homes. This demand never materialized. Instead, you have tight inventory in certain markets being fought over by investors and those willing to pay current prices while stretching their budgets. Yet volume remains incredibly pathetic. The homeownership rate has fallen dramatically and some point the blame to the Millennials. But as it turns out, the big drop has come from those 35 to 44. Generation X overall has been a massive drag on the housing market. The young are simply not buying homes like they once did and many are opting into the rental market. So how big of a drag is Generation X on the housing market?
There are bigger implications to the economy when rental rates are increasing at a rate faster than wage growth. This is important because we have added 7 million renting households in the last few years. For the moment, it simply looks like more money is going to be funneled into the housing market versus other segments of the economy. If your rent went up by $100, that is $100 that is not being spent on other sectors of the economy. Amazon already showed some hints that consumers are looking tapped out. Of course the holiday spending orgy is around the corner so we shall see. Falling gas prices help a bit but for consumers, housing is the biggest monthly line item expense. Landlords like home sellers are going to charge as much as they can. And with many homes now being owned by large investors, we are seeing steady rent increases in many markets. How far up can rents go? For rental rates, you are capped by what local area households can pay from actual income. It might be useful to examine the rate of increase between wages and rents.
Whenever we see an analysis of the benefits of buying a home there is always this underlying assumption that you will stay put in the same residence for a long duration. Of course, most people in places like California hop on and off the property ladder game multiple times. Repeat sales continually cut into equity gains and also cause buyers to experience new costs as they move into a new place. The assumption also is that you will always be selling into a rising market. That is not the case. Timing matters in a boom and bust market like California. We are seeing more homes being de-listed as sellers wait until next year as if a hidden trove of buyers will emerge ready to buy their crap shack at a hefty price. The market has suddenly softened. We also see many listing having price reductions which was nearly unheard of in 2013. Today we’ll examine Pasadena but also the underlying mentality that people somehow stay put for long durations in properties.
If you had to write two chapters on the housing market between say 2000 and 2007 and one between 2007 and 2014 both would look incredibly different. One was guided by massive exuberance and a populist movement of giving money to anyone with a pulse. The latest chapter is one guided by big investors and low inventory. This long horizon now brings us to the present. Housing values are up solidly over the last year but not because the general public is diving in head first. This latest push came from a multi-year trend of “cash buying” and investor dominance. That trend has slowed. In order to get more interest again, the Federal Housing Finance Agency (FHFA) is looking at making it easier for the public to get loans. Ignore the fact that this agency has been rebranded since it failed fantastically in the last bubble and is now once again in charge of overseeing Fannie Mae, Freddie Mac, and 12 Federal Home Loan Banks. Since many in the public can’t muster 5 percent for a down payment or have blemishes on their credit, the FHFA is looking at making things a tad bit easier for people to qualify. Instead of asking why so many have a hard time saving for a down payment or why people have lower credit scores, the banking/government hybrid is looking at making it easier for people to take on big debt with high leverage.