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Who Will Buy the Houses to Sustain the Real Estate Market?

The current real estate recovery is characterized by higher home prices driven by low inventory and high demand relative to the existing inventory.

The demand is driven by Fed induced low interest rates that has invited speculators to the real estate market.

In many areas fewer homes are being sold this year than last year (when not many homes were sold), yet prices continue to soar.

A sales down, prices up dynamic is not the characteristic of a healthy sustainable real estate market.

I have written that the current low inventory/high demand temporary market will soon reverse as more inventory becomes available while demand softens as investors and others are driven from the market by higher interest rates.

As I mentioned in a recent WSJ Marketwatch article, a healthy housing market thrives on a vibrant jobs market. Currently the job market is weak, especially among millennials who should be providing the pipeline for future homes sales.

According to the United States Bureau of Labor Statistics in July:
teenage unemployment was close to 25%;
only 162,000 jobs were created with over half of those jobs in retail and restaurant establishments;
the average work was week down;
wages were down;and
the labor participation rate was down (to 32 year low), creating what Reuters calls the “shrunken workforce“.

Yet consumer spending was up meaning that people are not rebuilding their savings; they are making less and spending more and going further into debt in the process. Millennials have the added burden of far larger student debts and default rates than previous generations.

With investors fleeing the real estate market because of higher interest rates, with fewer people working and those that are working are earning and saving less, who is going to be able to buy houses in sufficient volumes to keep the real estate “recovery” going? It doesn’t matter how low interest rates are if people don’t have the incomes, savings or credit to buy homes. Rising interest rates can only make a bad situation worse.

Just because a house of cards is still standing doesn’t mean it’s not a house of cards.

Despite the poor job market there exists a mentality in certain real estate markets to “get in before rates go higher.”

This is misguided as home prices will drop when rates rise and the economy slows further.

Jed Kolko, Trulia’s chief economist noted this behavior “Consumers are worried that mortgage rates and prices will keep rising before they buy, and many are willing to fight over the limited number of homes for sale”

This type of behavior is often seen during a market blow off top.

Another way of looking at the behavior of those currently bidding up home prices with the idea that they might miss their opportunity is like those that arrive late to the party and try to catch up on the good times by downing a quick handful of stiff drinks while the band is packing up. They end up with nothing but a nasty hangover.
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