This Winter put a damper on the economy, which is pretty amazing when you think about it. Even in the absence of epic snowstorms and traffic-snarling ice, winter has never been a good time for the housing market. No one really feels like trudging through snow to look at houses, especially when the kids are in school and everyone is busy with the holidays. Typically housing bounces back in the Spring; if families are going to move, they want to do it when the kids are out of school. But a funny thing happened this Spring: the housing market didn’t come out of its Winter slumber. Housing sales remain stubbornly slow, mortgage rates are up, and more than half of consumers are grumbling that they can’t really afford to sell their houses right now.
It’s always a challenge to report on the housing market in broad terms, because all real estate is local. Some markets, particularly in large metropolitan areas, are having a bangup year. In San Francisco rents have gotten insane, and the retail housing market in California is back to its usual level of crazy, where buyers write pleading letters to go along with their offer. Still, if you take out the insanely high markets, and those that are depressed because the city they’re in is dying, the news is not good for the industry. There are trends shaping up that show the housing industry may be facing systemic weakness in the years ahead.
Construction Employment Remains Stagnant
According to the Bureau of Economic Analysis, construction employment peaked in 2007, went on a steep decline over the next three years, and has stayed relatively flat ever since. While construction hiring has picked up a bit, it’s nowhere near pre-recession levels. That’s because we still have a giant backlog of inventory to work through and fewer people forming households.
Mortgage Rates Are On The Rise
Let’s face it, even at the new “higher” interest rates, 4.5% is a bargain in historical terms. All the same, it just feels higher, and every interest rate increase trims the number of mortgage applications. Apparently Wall Street banking isn’t the only sector of the economy with an addiction to cheap money. The mortgage industry is stumped as to why new home sales are flat and existing home sales are nosediving.
Consumers Aren’t Feeling It
Even though personal income is inching up, consumers aren’t feeling any richer. Maybe it was the fact that personal income took a hit around the holidays last year, because many businesses up north cut back on hours this Winter. Even three consecutive quarters of rising personal income and spending haven’t been enough to lift consumers out of their funk. Over half told Fannie Mae in a recent survey that they just can’t afford to sell their home right now. Maybe part of that is the 6% to 7% haircut they face on the sales commission.
A Glut of Inventory
On average, builders in the US need to construct about 1.5 million homes a year to keep up with demand. Over the insane housing boom days of 2005 to 2007, builders were cranking out 2.1 million new homes a year. Coupled with the overbuilding came a crashing decrease in demand, which made the glut of existing homes exponentially worse.
Those factors have combined to make housing a continued drag on the economy. Buying a home has become a pretty crummy deal for consumers, so it’s no surprise that roommates are doubling up, and kids are remodeling their parents’ garages into spare rooms. Who can really blame young people for not wanting to commit to buying a home these days? They’re coming out of college saddled with 10 years of crushing debt, and job security in America is a concept as far out of date as Howdy Doody.
The problems with the housing market are systemic and, unless something changes, permanent. A staggering 1 in 4 people regrets buying a home, a figure that rises to 28% if you take out people over 65. What industry can survive when a third of their customers regret doing business with them? If you want people to buy homes, then treat them like human beings — and make it a better deal.
