Never in the history of U.S. home sales have we had institutional investors so involved in the single family home market. In many areas once the bubble popped, we had big and small investors swallowing up over half of all sales for many years. The deals are now harder to find and investors are pulling back in a big way. We also have fewer distressed properties on the market so the properties that do make it to the “for sale” section tend to have more wiggle room in terms of sellers being resistant to lowering prices. For example, back in 2009 nearly 50 percent of all sales were of the distressed variety nationwide. Today, it is slightly below 10 percent. It is a good thing to have fewer distressed properties out in the market. But what happened over the last decade is many of the 7,000,000 foreclosures shifted from individual families into the hands of large and small investors. This is how we have a very large swing to renting households. It might be useful to take a deep look at all cash sales today.
There is a running meme in the housing industry and it revolves around intelligence and home buying. The subtle undertone is that those that own real estate are somehow much more financially savvy because they own property. I’m surprised we don’t see this on LinkedIn as “…and also intelligent homeowner.” On paper, at least nationwide, homeowners do have a higher net worth than renters. Yet this is nationwide and also doesn’t go into the details that most of the net worth is locked in housing which does not throw off income. So are all those young tech workers in San Francisco that currently rent financially ignorant? That is the issue when using nationwide figures to extrapolate onto niche markets. It also doesn’t factor in the reality that for many, buying today at current prices would equate to self-imposing a financial albatross around your neck for many years. That of course assumes you can even buy to begin with. And keep in mind the recent economic upturn hasn’t been all that great. The recent election was driven by frustration regarding the economy. That is how you explain the cognitive dissonance of Republicans “winning” yet many states enacting higher minimum wages. Huh? These things speak to the underlying tone of economic frustration Americans are facing. Then we have the FHFA trying to make it easier for people to get into further debt by making lending standards weaker. Ultimately you have sales collapsing and people on the fence because buying a crap shack today would financially cripple many households for years to come.
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.