Why Are New Home Sales Still Far Below Those of Prior Decades?

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.

They aren’t.

New Home Sales

new home sales 1963 -2016 high low by decade

New home sales between the “housing recovery” years 2010 – 2016 are at best comparable to the new home sales of the 1960’s.

Chart source: US. Bureau of the Census, New One Family Houses Sold: United States, retrieved from FRED, Federal Reserve Bank of St. Louis May 24, 2016.

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.

household income 2000-2014

Median household incomes have not risen since the end of the Great Recession, while new home prices have soared to record highs.

US. Bureau of the Census, Real Median Household Income in the United States retrieved from FRED, Federal Reserve Bank of St. Louis, May 30, 2016.

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

labor force participation rate 2008 -2016 march

The overall labor force participation rate has fallen steadily during the “jobs recovery”.

US. Bureau of Labor Statistics, Civilian Labor Force Participation Rate, retrieved from FRED, Federal Reserve Bank of St. Louis, April 18, 2016.

Civilian Labor Force Particpation Rate 2008 -2016 – aged 20-24

Labor Force Participation Rate 20-24 year olds 2008 - 2016 march

The labor force participation rate for those 20-24 is lower in 2016 than it was during the great recession of 2008 -2009.

US. Bureau of Labor Statistics, Civilian Labor Force Participation Rate: 20 to 24 years, retrieved from FRED, Federal Reserve Bank of St. Louis, April 18, 2016.

Civilian Labor Force Particpation Rate 2008 -2016 – aged 25-54

labor force participation rate 25-54 march 2008 -2016

While the labor force participation rate for those aged 25-54 has increased in 2016, it remains lower than the rate during the Great Recession of 2008-2009

US. Bureau of Labor Statistics, Civilian Labor Force Participation Rate: 25 to 54 years, retrieved from FRED, Federal Reserve Bank of St. Louis, April 18, 2016.

Civilian Labor Force Particpation Rate 2008 -2016 – aged 55+

Labor force participation rate  55+ 2008 -2016

The labor force participation rate among those aged 55 and older is higher in 2016 than it was during the Great Recession of 2008-2009.

US. Bureau of Labor Statistics, Civilian Labor Force Participation Rate: 55 years and over [LNU01324230], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/LNU01324230, April 18, 2016.

Civilian Labor Force Particpation Rate 2008 -2016 aged 65+

labor force participation rate 65+ 2009-2016

The labor force participation rate of those aged 65 has increased from about one in five in 2009 to nearly one in four in early 2016.

US. Bureau of Labor Statistics, Civilian Labor Force Participation Rate: with No Disability, 65 years and over [LNU01375379], retrieved from FRED, Federal Reserve Bank of St. Louis, April 17, 2016.

3. Record High New Home Prices

New home prices hit a record high in early 2016.

New home prices 2009 -2016

New home sale prices have risen steadily since the Great Recession of 2008-2009 and hit an all time high in 2016.

Bureau of the Census, Median Sales Price for New Houses Sold in the United States, retrieved from FRED, Federal Reserve Bank of St. Louis, May 29, 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”.

Further Reading

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

JM Bullion

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