New home sales during the housing “recovery” of the past few years are roughly equal to the lows of new home sales of the 1960’s, 70’s and 80’s.
More new homes were sold in many months in the 1960’s and 1970’s than were ever sold during any month during the period of 2010-2016.
Three Factors Are Holding Back New Home Sales in the United States.
Lack of Inventory Housing Myth
Despite a rise in the prices of existing and new homes to pre-housing crash levels, new home sales in the United States remain mired at levels below those in the 1960’s and 1970’s when the population was approximately 40% smaller. Existing home sales have improved but remain far from the 2005 peak.
An often cited rationale for lower existing home sales is a lack of inventory. Citing low existing home sales because of an inventory shortage is an excuse for a poor housing market that reflects a poor economy.
If there is a shortage of existing home inventory, one might think that new home builders would be busy trying to supply inventory to the market to make up the supposed inventory shortfall.
New Home Sales
Three Reasons New Home Sales Remain Mired at Multi-Decade Lows
1. Student Loans
40% Of Student Loans are Deliquent or in Default
Nearly 10 million Americans with government backed student loans weren’t making payments as of January 1, 2016. According to the Wall Street Journal, forty-three percent of the twenty-two million Americans with federal student loans were not making payments for one reason or another.
Default, Late or in Forbearance
About 16%, or 3.6 million, were in outright default in the aggregate of $56 billion in student loans. Another 14%, or three million, were at least a month behind on their payments which in the aggregate total $66 billion. Yet, another three million Americans with student loans have some type of permission to suspend payments due to inability to pay usually because of unemployment.
Virtually NONE of these approximately ten million Americans will be buying a new home this year or next.
If 43% of those with student loans are in the cicumstance where they can’t pay, how many are close to not being able to pay and ready to throw in the towel and stop paying? A fair estimate might bring the total from 43% to more than half.
Of the ones that can afford to pay their student loans, how many can afford to also buy a new house? The new home sales figures of the past six years, indicate far fewer than in prior decades.
Millennials are currently in their prime working years. Not only are they saddled by massive student loan debt, but as a group are working and earning less.
2. Poor Job Market
Another reason that the housing recovery hasn’t led to a healthy increase in new homes sales is the weakness of another “recovery” – the job market recovery.
Despite the unemployment rate dipping from double digits at the height of the Great Recession to about 5% today (in part because people who have given up on working are no longer considered unemployed even though they are not working) for those working, income gains are tiny.
They Myth That the Labor Force Participation Rate is Declining Because of Retiring Baby Boomers
In “Why The Job Recovery is a Farce“ published in March 2015, we showed that the labor force participation rate was falling. The pace of decline in the labor force participation rate, however, was greater for those in their prime working years.
The only group that showed an increase in the labor force participation rate were those aged 55 or older with the most pronounced gains for those 65 and older.
In “Why the Job Recovery is STILL a Farce“ published in November 2015, we showed that the trend of older workers postponing retirement by remaining in the work force or coming out of retirement continued, while the labor force participation rate of those in their prime age working years was at its lowest level since the early 1980’s.
The same low rates that have helped drive home prices higher also destroyed the ability of retirees to live off interest on their savings, hence the increased baby boomer labor force participation rate.
The labor force participation in early 2016 is still hovering at levels last seen in 1979, when fewer women were attatched to the labor force. The often cited reason for a decline in the overall labor force participation rate is that baby boomers are retiring and driving the percentage of people attached to the labor force lower.
A review of the labor force participation rates by age groups shows that not to be the case. Most troubling is the labor force participation rate of those in their prime working and home buying years (25-54) has declined during the “job recovery” of 2009-2016.
Civilian Labor Force Particpation Rate 2008 -2016
Civilian Labor Force Particpation Rate 2008 -2016 – aged 20-24
Civilian Labor Force Particpation Rate 2008 -2016 – aged 25-54
Civilian Labor Force Particpation Rate 2008 -2016 – aged 55+
Civilian Labor Force Particpation Rate 2008 -2016 aged 65+
3. Record High New Home Prices
New home prices hit a record high in early 2016.
While many cheer on rising home prices, there is a dark side to higher home prices – unaffordability.
Record high new home prices, a lower percentage of those in their prime home buying years attached to the labor force, many of whom are defaulting on their student loans has kept home sales at levels that could hardly qualify as one associated with a housing “recovery”.
The Dark Side of Higher Home Prices
“Student Loans and Unemployment are Holding Back the Economy and Real Estate Market”
Here Homes Gen Z to Housing Recovery Rescue
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