The resurgent U.S. housing market may not be as robust as advertised. Here's the problem: too many all-cash buyers, not enough mortgage-financed buyers.
While it's true that home prices have bounced from their 2010 lows and that sales volumes have picked up somewhat, the structure of this rebound is not ideal. The traditional "core buyers" are missing in action. These core buyers are the young couples and young families who use mortgages to purchase homes.
Either they can't get a mortgage or they don't want one. Whatever the case, mortgage originations continue to languish near 17-year lows... even though mortgage rates are near the lowest levels in a generation.
Instead of mortgage-financed buyers, all-cash buyers have stepped in and become a huge presence in the housing market.
Too much cash is rarely a problem in any circumstance and, to be fair, it is not
yet a problem in this circumstance. But all-cash buyers are not the heart and soul of the U.S. housing market. Mortgage-financed buyers
are... and they have been conspicuously absent during the post-2008 housing "recovery."
As the chart above shows, mortgage originations and home sales tend to move in lockstep... at least they did until about three years ago. At that point, home sales volumes increased despite
no increase in mortgage originations. All-cash buyers accounted for the entire increase in home sales volumes.
But the housing market cannot live on all-cash buying alone. It needs mortgage-financed buyers, for obvious reasons - the first of which is simple math. The number of potential mortgage-financed buyers is vastly greater than the number of potential all-cash buyers.
In fact, before the housing market imploded in 2008, mortgage-financed buyers purchased nearly 90% of all homes. But since 2008, that percentage has tumbled to less than 70%... or less than 60%, if you trust the latest numbers from RealtyTrac. If these buyers don't resume their traditional home-buying patterns, the housing market seems likely to struggle for a good long while... and maybe even retest its bust-level prices.
Unfortunately, mortgage-financed buyers are showing no sign of returning to their traditional home-buying ways. Instead, they are renting... or living with their parents.
In a healthy economy, young adults leave the nest to form households. We all know the story... Boy meets girl; girl gets pregnant; boy and girl take out a mortgage to buy a home they can't really afford. But in the current economic environment, something different is happening: Boy is still meeting girl, and girl is still getting pregnant, but then boy and girl are moving in with the parents of either boy or girl. They are
not securing a mortgage to buy a house they can't really afford. (Besides, living with the parents means saving on babysitters. It's a solid economic decision all around.)
Young adults are not living with their parents because Mom's cooking is just so darn good, or because it's such a kick to watch
Seinfeld reruns with Dad. They are bunking with the folks because that option is
slightly more attractive than sleeping on a park bench.
Young adults are living at home because they cannot afford to do otherwise. Perhaps that's because the Land of Opportunity isn't offering an abundance of opportunity these days. The labor participation rate among 25- to 34-year-olds has been trending lower for nearly two decades... and falling very sharply since the 2008 crisis.
Without a healthy group of mortgage-financed buyers, the housing market must rely on a growing percentage of all-cash buyers. That's a tough way to sustain a healthy housing market, because all-cash buyers can be a fickle source of demand.
It's true that some all-cash buyers provide a relatively steady source of demand, especially the wealthy foreigners who are snapping up properties in Southern California, South Florida and elsewhere. However, a large percentage of the all-cash crowd is focused on investment, rather than on shelter. Both small-time investors and institutional investors have flooded into the housing market to buy houses and convert them into rentals.
These folks tend to show up for a good time, not for a long time. If either home prices or interest rates rise from current levels, investors are likely to lose the incentive to purchase single-family homes as rental properties.
We suspect a large percentage of these investors would never have bothered with the housing market, if not for the fact that the Federal Reserve has been suppressing interest rates. But because the Fed has been holding its thumb on interest rates for six years, many investors abandoned the fixed-income markets to find yield elsewhere.
One of the primary destinations for their capital became the U.S. housing market, as the chart above shows very clearly. As soon as interest rates started tumbling in 2008, all-cash buyers became conspicuously large buyers of single-family homes.
Therefore, if/as/when interest rates "normalize" - i.e., rise to pre-crisis levels - we suspect these investors will return to the fixed-income markets rather than deal with the hassle of converting homes into rental properties.
Inconveniently, rising interest rates would create even greater challenges for mortgage-financed buyers. In other words, rising interest rates could "chase" both of these buyers out of the housing market at the same time.
The U.S. housing market may not be in any immediate peril, but like any structure that sits atop a shaky foundation, you probably don't want to put too much weight on the floorboards.
Good investing,
Eric J. Fry
for Free Market Café
No comments:
Post a Comment
Keep a civil tongue.