The False Housing Recovery of 2014

The False Housing Recovery.

Housing Outlook for 2015.

The False Housing Recovery of 2013 continued in 2014.

After a few years of false starts, the housing market remains stalled.

Existing Home Sales Down 3% in 2014.

Housing Recovery? What Housing Recovery?

The definition of recovery is a temporary period between sickness and wellness. The housing “recovery” has been a five year media event, with no significant improvement in the housing market.

In 2013 in “The False Housing Recovery of 2013” and the “The Housing Recovery that Never Was is Over” last year, we noted the tepid, at best, pace of the housing “recovery.”

In April 2014 we listed:

◾ declining pending home sales;

◾ the burden of student loans and lack of employment opportunities shutting many millennials out of the housing market;

◾ declining home ownership rate;

◾ low existing home sales;

◾ historically low new home construction;

◾ rising interest rates;

◾ declining mortgage applications;

◾ low household formation rates;

◾ stagnant wage and job growth;

◾ large percentage of homeowners with underwater mortgages;

◾ historically low percentage of first time home buyers;

◾ a high percentage of investor/all cash house buyers; and

◾ decreasing home affordability.

The above factors were ignored by the economic recovery cheerleaders as home prices were rising and the “recovery” mantra continued unabated. The only thing preventing a more robust recovery was an “inventory shortage”. If there were more homes for sale, the narrative went, more homes would be sold.

Thus, the current housing “recovery” has been characterized by low demand, artificially low interest rates, low new home construction, low new home sales, low existing home sales, low home ownership rate, low labor participation rate and low wages. It was true six months ago and is still true today. Yet against this back drop, home prices continued to rise.

It was true then and is still true. The only difference is interest rates are lower, prices are slightly higher and there is supposed GDP and job growth.

What has changed since then? Existing home sales, new home sales, pending home sales, new home permits, purchase mortgage applications are all down. Even the low interest rates that were supposed to help drive home sales are down further. More inventory came on the market in 2014 and had little or no impact on home sales. Yet the housing “recovery” story persists.

Indeed, when faced with negative numbers like a decline in housing starts, the headlines blurted inanities like: U.S. housing starts, permits fall; trend points to recovery. Persistent bad housing data is always “unexpected.” Facts do not interfere with the housing recovery story.

Higher home prices are touted as evidence of a housing recovery even though they serve to make homes unafforadable, especially for millennial first time home buyers who are underemployed. In “the Dark Side of Rising Home Prices’ we noted that rising home prices are:

◾ are artificial;

◾ create wealth disparity;

◾ cause property taxes to rise;

◾ prevent mobility;

◾ are bad for the real estate industry;

◾ raise home affordability; and

◾ will come down.

Current Status of the Housing Market

Existing Home Sales

Existing home sales were essentially flat year over year in 2014. Existing home sales remain below five million on a seasonally adjusted basis. The most recent reading at a rate of 4.93 million was the lowest in six months. Lack of inventory was blamed for the decline.

Despite falling interest rates, mortgage applications are down year over year and plunged sharply in the most recent report.

New Home Sales

New homes construction is a good indicator of the strength of an economy. Booming new construction creates far more jobs than trading ever more expensive used homes. New home construction in 2014, however, was at levels last seen in the 60’s and 70’s when the population was 35% lower.

New Home Sales 1960-2014

new home sales chart 1960-2014

New home sales during the past five years remain at depressed levels despite the economic and housing recoveries.

Source: U.S. Bureau of the Census, New One Family Houses Sold: United States, retrieved from FRED, Federal Reserve Bank of St. Louis , December 28, 2014.

Reuters reported that new home sales down to a seasonally adjusted 438,000 in November of 2014 was an indication that the “housing market recovery remains fragile.”

Fragile? More like shattered.

For most of the 1960’s 70’s and 80’s and all of the 90’s through 2007 new home sales were above 400,000. Since 2008 new home sales have been stuck in the 400K to 500K range.

If there was an inventory shortage one might think home builders would fill the void by ramping up new construction. There hasn’t been an increase in new home construction because demand is lacking. Potential home buyers do not have the incomes to support increased home buying, especially at prices that are higher than they were just two years ago.

In light of low new home demand Trulia’s economist postulated in late 2014 that it’s possible that homebuilders are building new homes in excess of demand, a suspicion we raised here in September 2013.

A Small Bright Spot

Demand for new construction of multi-family homes increased the past few years to meet demand for rental units (for millennials) as the home ownership rate fell to the lowest percentage since the mid 1990’s. Demand for housing for those 55 years old and older has also increased in recent years (for boomers with jobs and money).

Demand for new construction of multi family and active adult homes, however is not enough to replace the demand lost for newly constructed single family homes.

Chart of homeownership in the United States 1995-2014

The homeownership rate declined during the entire period of the housing “recovery”.

Home Prices

The only area of the housing “recovery” that has shown improvement is in rising home prices. Home prices rose over 10% in 2013 and in single digits in 2014. Rising home prices, however provide the illusion of a housing recovery. Higher prices make the housing market worse and postpone any meaningful recovery.

Prices need to come down.

Higher prices are holding back the housing recovery. According to a recent survey by Redfin higher home prices rather than the lack of inventory was the greatest impediment in their home buying plans. Higher home prices mean lower sales, fewer first time home buyers and fewer commission checks for real estate agents and mortgage brokers.

If there is a Solid Economic Recovery, Why is the Housing Market Not Performing Better?

Lack of Well Paying Jobs/No Wage Growth

Even with supposed “solid” job growth and the “enduring strength of the U.S. economy“, existing home sales, mortgage applications, new home sales and new home permits are all down year over year.

If any of the economic cheerleaders reporting the job numbers from the Bureau of Labor Statistics (BLS) each month actually read the reports instead of simply parroting the top line job number from the BLS press release, they would find that the bulk of the job growth is in the 55+ age group (not a large home buying group) and in part time jobs.

Similarly, if one looks beyond the GDP numbers reported, one would see that the numbers are boosted by items that are not indicative of a productive economy such as increased consumer spending on health care, health insurance premiums and utility bills, military and other government spending, inventory accumulation and corporate research and development expenses.

The reason the housing market is weak, is because the economy and job market are weak despite the pollyannaish headlines.

Who Will Buy the Homes to Extend the Housing Recovery into 2015


We heard througout 2013 and 2014 that millennials represented pent up housing demand and that their emergence from their parents’ basements was imminent. Housing recovery cheerleaders still cling to this narrative. But, it hasnt happened as 30% of 30 year olds and nearly 50% of 25 year olds are living with their parents. Many millennials are strapped with large outstanding student loans and poor job prospects, making home ownership unrealistic.

Sensing that Gen Y housing demand may never materialze as expected, one real estate brokerage began touting Gen Z as the housing industry’s next best hope.

Click here for further analysis on limitations facing each group of potential homebuyers.

What Will Be Tried Next To Boost the Housing Market?

To date headlines and housing recovery stories have not been supported by an actual improvement in the real estate market. What will be tried next to boost the housing market?

Government Intervention

Freddie Mac and Fannie Mae Three Percent Down Payment Mortgage Programs

Despite the suppposed housing recovery Freddie Mac and Fannie Mae announced a new 3% down mortgage program to stimulate home sales.

If the U.S. economy and labor markets are showing “solid” gains why is there a need for a program of this nature?

Reduced Federal Housing Administration Mortgage Insurance

President Obama announced a plan to reduce mortgage insurance premiums nearly in half for first time home buyers and some existing home owners. This plan is yet another indication that the housing “recovery” is no recovery at all and needs another boost of stimulus.

Continued Accomodative Federal Reserve Monetary Policy

From 2009 to October 2014, the U.S. Federal Reserve (the Fed) conducted a series of quantitative easing (QE) programs that involved printing dollars in order to buy U.S. Treasuries and mortgage backed securities. The Fed printed over $4 trillion as part of three rounds of QE.

Current Federal Reserve President Janet Yellen and her predecessor, Ben Bernanke have justified QE and their zero interest rate policy (ZIRP) as providing a salubrious effect on the housing and stock markets and the economy.

Low interest rates and QE did create a booming stock market and higher real estate prices. Real estate sales, however, are only partially driven by interest rates. Real estate sales are also driven by affordability, job and wage growth, access to mortgages, rent to buy ratios, and consumer desire to own homes. Existing, and especially new home sales, did not increase much the past five years despite QE as home prices rose, wages didn’t and mortgages were hard to come by.

Now that QE is over, the Fed is threatening to raise interest rates. If lower rates didn’t spur housing sales, higher rates won’t help. We don’t believe the Fed will raise interest rates because it would send the U.S. economy back into recession, raise the cost of government borrowing, cause the stock market to fall and depress home sales further. Rather, we think the Fed will engage in “quantitative patience” by telling the markets to be patient on the timing of any rate increase, but never following through and raising interest rates.

2015 Housing Outlook

Despite any meaningful increase in new or existing home sales in 2014, and having spent 2014 dismissing negative housing reports, media real estate pundits are uniformly optimistic about the housing market in 2015.

The Media Outlook

Here are some of the stories covered by the major media outlets:

Young Home Buyers Return to U.S. as Economy Accelerates Bloomberg

“An increase in first-time buyers, whose market share dropped to a record low last year, will provide a boost to the sluggish mortgage industry”

Real estate pro’s 2015 forecast: Axis of housing happinessCNBC

“I call it the axis of housing happiness in that you have jobs, you have low oil prices and you have low interest rates.”

Housing Out Look Positive for 2015Reuters

“improving labor market, low mortgage rates and stock market record highs boost 2015 outlook,according to Lawrence Yun, National Association of Realtors”

Why it Will be Easier to Buy a Home in 2015Business Insider

“Economic recovery and an improving job market will go a long way to boosting affordability for buyers in many markets.”

Homebuilders and The National Association of Realtor Outlook

New Home Sales

The chief economist of the National Association of Realtors (NAR) believes new single family home construction will jump 41% to 624,000 new homes in 2015 and the National Association of Home Builders predict a 24.3% increase to 547,000 sales in 2015.

Existing Home Sales

NAR predicts that existing home sales will rise about 7% in 2015 as “a strengthening economy and job growth leads to a healthier market.”

This prediction flies in the face of a drop in home sales in 2014 of about 3% from 2013, despite “solid” job market growth and an acceleration in GDP in 2014.

Homeowner Outlook

Homeowner Delusions

Confidence in Housing Market Shows Little Change – Homeowners

The incessant “recovery” propaganda on the health of the economy probably has homeowners misreading reality. A December 2014 Rasmussen poll showed “36% of Adult Homeowners think the value of their home will go up over the next year, down from November’s all-time high of 40%. Twelve percent (12%) believe their home’s value will go down next year, but nearly half (47%) say it will remain about the same.”

Smaulgld Outlook

Six years of QE and ZIRP proved that it’s easier to manipulate the stock market higher than it is to generate home sales. Investors poured money into equities and drove stock prices higher the past few years when interest rates were low as fixed income instruments became unattractive. No stock is too expensive to purchase and earnings can be disregarded as long as the stock price is rising. The stock market party will end at some point in the not too distant future, brought down by the reality that the underlying economy doesn’t support the lofty stock valuations or a collapse caused by an implosion of oil derivatives, or both.

The housing market, in contrast, depends on real world considerations like home affordabiity, job stability, appraisals, qualifying for mortgages and ability to pay mortgages. These factors have prevented a rise in home sales as home prices are too high and wages are too low.

Giving out mortgages to home buyers with just 3% down, lowering the FHA mortgage insurance and keeping interest rates low may boost home sales in 2015 even as job and wage growth stagnate. Lowering the bar for home ownership to generate more home sales, however, is no substitute for real economic growth.

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Further Reading:

The False Housing Recovery of 2013 and How it Unravelled

The Recovery Has Reversed – Welcome to the Revocery

How QE Stunts Job Growth

The Housing Recovery and the Law of Small Numbers

The Dark Side Of Rising Home Prices

Why the Housing Recovery is a Farce Illustrated by Two Charts

Who Will Buy the Houses to Sustain the Housing “Recovery”

Millennials, Not Part of the Club Yet

Low Interest Rates are Harming the Housing and Labor Markets

Student Loans and Unemployment are Holding the Housing Market Back

Waiting for Household Formation

Will the Fed Ever Raise Rates

Initial Jobless Claims

Straining to Regain Real Estate’s Promised Land

Student Loans are Holding Back the Housing Recovery

The Coming Supply/Demand Real Estate Inventory Reversal

Who Will Buy the Homes to Sustain the Housing Recovery?

How QE Encourages Stock Buy Backs, Discourages Hiring and Stunts the Housing Market

Real Estate’s Catch 22

The Housing Inventory Shortage Myth

Housing Recovery and Law of Small Numbers

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