Housing data released recently suggests that challenges to the housing industry still remain almost six years after prices plunged precipitating the Great Recession. New home sales in March collapsed 14.5% month-over-month to their lowest since July 2013. Pending home sales in February fell for the eighth time in eight months. Prices in most areas of the country are still well below their 2005-6 highs as diminished demand is putting the brakes on the housing recovery. Clearly significant challenges still remain that affect housing demand. Why is housing faring so poorly this far into the economic “recovery?”
Household formation has declined due to the weak recovery.
Many young adults are unable to find employment after college or high school. A lack of quality jobs is causing some college grads to continue their schooling and or postpone marriage, thus delaying their first home purchase. In fact, according to the NY Times, the number of households increased an average of 1.35 million a year in 2001 to 2006, compared to 569 thousand a year from 2007 to 2013.
Tough economic conditions have resulted in many families living under the same roof and made it hard for first time homebuyers to save for a down payment.
A record 13.6% of Americans aged 25-34 are living with their parents, (an increase of over 30% compared to the year 2000). The lingering recession has also affected Baby Boomer living arrangements. For the seven years through 2012, the number of Californians aged 50 to 64 who live in their parents’ homes swelled 67.6% to about 194,000, according to the UCLA Center for Health Policy Research and the Insight Center for Community Economic Development.
Many individuals cannot get a loan either due to poor credit or conservative bank lending standards.
Many business owners are wary of purchasing a home due to uncertainty regarding the economy and the Affordable Healthcare Act.
Baby Boomers are downsizing and or moving to multifamily housing.
In fact, much of the recent growth in housing has been due to strong performance in this sector. Out of work Boomers and young adults unable to find employment are causing the US to increasingly become a renters’ society.
With prices still below the 2005-6 peaks homeowners are loathe to put their homes up for sale.
Perhaps, the American public is finally learning a valuable lesson about real estate. Your personal residence is not an investment in the traditional sense, as it does not throw off income and over the long term it has a poor rate of return that rarely beats inflation. In fact, the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation.
Due to extraordinary performance in the late ’90s and early to mid ’00s, many home buyers were lulled into thinking that their home was a piggy bank, an investment that was sure to go up indefinitely and that would never decline in value. This misinformed thinking resulted in homeowners (and investment bankers alike) allocating far too much of their assets to housing. An increasing proportion of household income was diverted to mortgages and other home expenses in lieu of investing in their retirement or college education. This resulted in a distortion of investment dollars and ultimately a bubble in home prices, which collapsed leading to the Great Recession. Our hot love affair with housing ended as most do, and now we are paying the price. The Federal Reserve has kept interest rates low to bring the magic back, to little avail.
Americans need to stop focusing on maximizing square footage; and instead, focus on more productive, higher return investments. For some perspective, according to the Milken Institute, middle class households in eleven Asian nations spend 16% on housing and transportation whereas the average middle class American homeowner spends roughly 50% of income on housing and transportation. Clearly, our priorities are out of alignment. We are putting a lot of eggs in one basket at the expense of saving for other goals like, retirement, college education, and healthcare costs.
In order for society to allocate investment dollars to productive endeavors that enhance economic growth, we need to rethink our love affair with real estate.Read Full Article