We are in a housing recovery, yay! Not so fast there Mr. Headline. Before we get too giddy about the happy run up in home prices, we need to assess some important fundamentals. House prices across the spectrum are heavily dependent on first-time home buyers. The first-timer buys a home from an existing homeowner who is then able to purchase a more expensive home, which allows that homeowner to buy an even more expensive home and so on. Over the past 30 years, first-time home buyers represented 40% of existing home sales. According to the National Association of Realtors, in June of 2013, first-time buyers represented only 29% which was a drop from 32% a year earlier. Why this deviation from historical norms? First-timers are typically younger than existing homeowners. In today’s market, younger workers have a higher unemployment rate than the overall workforce and are also saddled with much larger student loans than in the past. Their required payments on these loans reduce how much of a mortgage they can afford, their ability to save up for a down payment and lower their credit score.
In August, sales of new single-family homes dropped to their lowest level since last October, according to the department of Housing and Urban Development.
The Mortgage Banker Association reported that their mortgage application index just fell 13.5% from the week ended September 6th, reaching a five-year low.
Median household income, which greatly affects home affordability thus prices, was $52,098 in June 2013. That’s still down significantly from the start of the recession in December 2007 when it was $55,480. (Both figures adjusted for inflation)
Now for one heck of a head scratcher! Interest rates on jumbo mortgages, which are too big for government backing, have historically been at higher rates than conforming loans, which are back by Fannie Mae, Freddie Mac or other government agencies. At the end of August the relationship flipped, putting the interest rate on larger mortgages that lack government backing lower! This is the first time in history that this has happened, further highlighting the dramatic impact of the recent sharp rise in interest rates.
Bottom Line: Until youth unemployment and the mind-boggling rise in tuition fees are addressed, home prices will continue to face limiting headwinds. In addition, there have only been 16 periods in the past 50 years when interest rates rose more than 20% in 200 days. The recent rise in rates has been dramatic on a percentage basis. Be wary of the impact on housing.