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Monday, April 22, 2013

Mortgages And Home Prices

I have recently been awed and dazed by the lack of realism at very top levels in US economics. For instance, home prices.

You can get US median household income historical data at this census page. It's split by ages in the H9 table. The data is currently only available through 2011.

The housing market is determined by new buyers, esp. first-time buyers. Therefore, when discussing affordability, you have to concentrate on the possible first-time buyer brackets.

This, of course, is the most important one. There has been over a 10% drop in real median incomes since 2000.

But catch-ups are a factor also:
They've actually done worse compared to the kids. For both of these brackets, prices with comparable interest rates should not be back to 2003 levels, but mid-1990s levels.

Actually, it should be worse. These cohorts will face higher real tax rates than they have during the last decade, especially on the state and local level. They will face higher insurance costs than they historically have, because the population is aging and that cost will be redistributed across the younger cohorts.

If interest rates come up meaningfully, prices must fall pretty damned hard. But interest rates cannot remain where they are after the Fed ceases its frenetic bond-buying campaign. They cannot. I don't expect the Fed ever to sell out, but they also cannot continue to buy at these levels.When they start to come off it, I expect mortgage rates to rise to 4.5%.

Student loan debts are an issue for the younger crowd. Obviously they will find it harder to save even a 3.5% downpayment. Not only do they have lower real incomes, but more of their incomes must be diverted to basic costs such as food, energy and medical. Even if they do not have high debt levels, this generation will find it harder to accumulate cash.

We are coming to a situation in which a household in the 25-34 bracket composed of 2 graduate degree holders is going to be less likely to buy a home than a working-class household. This is not stable.

The investors in the market are producing price increases that can't be supported longer term. Vacancy rates are still way too high. Homeownership rates are way down and must fall for some time further:

This doesn't mean that housing will be a drag the way it has been in recent years. It does mean that home prices will be constrained for a long, long time, and that home prices in many areas will slowly continue to fall over time.

Rental vacancies are still quite high:

This is in no sense a strong housing market, and it contains future price devaluation risks that are substantial, so creditors are facing a high-risk environment.

Does all of the above look like it supports this?

No. And if you think it does, you are demented, no matter what job title and credentials you hold. To even have a chance of getting back to supportable levels, this pricing index has to fall to about 140, assuming that mortgage rates don't get back over 4.75%. 

It is true that household formation is picking up, but that doesn't mean that finances support much buying, and anyone with any sense should already have realized that strong investor buying coupled with falling single-family rents in some markets amounts to a screaming canary in a mine rapidly filling with gas. 

There ain't no gold here, folks. Real household incomes for the most important home-buying bracket are about where they were in 1973. They are also very comparable to where they were in the mid 1990s.

The FED cannot back off without immediately tanking the entire economy -- they're trapped.

Some argue that rates would stay low without Fed buying due to that same tanked economy, but that ignores the risk component in rates. Housing price risks are being totally mis-priced due to government holding most mortgage debt.

So, should there be a fantasy world in which first (a) the Fed stops buying and thus (b) DC stops overspending, housing literally rolls over and dies. Low downs, single digit rates... hell even 30 year fixed loans would be history.

p.s.: Notice how fast the G20 shot down any thoughts of budget discipline?
TJ - I certainly did notice G20's move.

But did they realistically have any other option?
The NAR can go ahead and keep holding its breath for us to buy our first house. (We are in our mid-to-late thirties.) Our money has gone toward paying off student loans, having children while we still can, keeping our car running, starting side businesses as a hedge against layoffs (many of our friends are doing this as well), and paying for health insurance that now costs as much as our rent.
30 year loans would be history?

Thank God. They were essentially nothing but a bank bailout.

Something tells me they won't go away, I have a feeling they'll be foisted upon people who don't want them and pre-payment of principal will come with a penalty.

Peggy - that's it exactly. When your total housing payment (including taxes and insurance) goes below rent, that's the time to think about buying.

I think the businesses are a good idea, btw. It's not just a hedge for now, but so many are losing employment in their late 50s - it's great to have something else already going to tide you through.

I think the fiscally responsible people are hunkering down and doing what they can to get through, knowing that the times aren't the best and every year, things seem to get a little harder.
Peggy - re the student loans - one thing I've noticed about younger successful couples that have good jobs - they don't even want to buy cars. They may pay for vacations, but they try to work it so that they don't have to buy cars or only just one.

The student loans are a big factor currently. And they will continue to be for many people.

The actual rate of inflation for many people is more like 10%, when you look at all the expenses like insurance.
MOM, my current car just turned 16. The family joke among my siblings is you can't buy a new car until the old one is old enough to vote.
Just so long as that classic votes Dem!!! Early and often.
MOM, it can't vote Dem; it's not dead yet. :-)
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