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Just Another Artificial Stunt, Or Is The Real Estate Market Really Going Up?

by Chris Feltus on May 16, 2014 · 11 comments

  

What natural factors organically drive the price and demand for real estate?

The answer: first time home buyers, trade up buyers and downsizing families.

The first group (first time home buyers) is being adversely affected by current economic conditions.The marks of a healthy real estate market is characterized by a strong pool of first time home buyers.

We can only do so much as investors to fill this void.

In other words, it does not appear we have an organic, natural recovery of the housing market.

No matter how many hedge funds are purchasing distressed assets off the books, or how many local investors there are restoring homes in local communities, it all comes back to fundamentals of the market, namely first time home buyers.

This group, for obvious reasons, tends to be a younger demographic, therefore we will discuss issues that pertain directly to them.

The aim of this article is to put to light concerns backed up by factual sources and the problems the housing recovery will face moving forward.

After all, I somehow doubt 50% of all real estate transactions being in cash are first time home buyers.

Home-Ownership Rates:

According to a new study released by the US Census Bureau, home ownership rates have fallen to the lowest level in 19 years and the data is continuing its downward trend.

Keep this information  in mind as we discuss the underlying reasons for this in more depth below.

1. Home-ownership rates

The Plight of the Young, Future First Time Home Buyers:

Underemployment, unemployment and depressed wages are resulting in tight credit and creating a real challenge for potential new homeowners to save up for a down payment and afford a mortgage.

As a realtor I see the impact of this first hand everyday with potential clients.

Debt burden continues to be an issue as well. Assuming one is able to find gainful employment after college, the cost of higher education is rising at nearly 500% the rate of  inflation and continuing to grow exponentially (in a literal statistics sense).

As a result, the first time home buyers demographic is carrying a high debt burden. Some are already leaving college with a loan that basically amounts to a mortgage before even having a mortgage.

Instead of buying, current economic conditions favor renting for many. It is no coincidence that rent rates are high right now, tight inventory and the aforementioned factors are making it difficult for first time home buyers to actually buy.

2. The Plight of the Youth future first time home buyers

Related: Don’t Cry for Thee, First-Time Homebuyers

Employment:

Assuming one can find gainful employment wage growth has been stagnant along with job growth.

Reports now show the unemployment rate is falling; however, this is actually due to how unemployment is calculated. As more Americans leave the work force and labor participation rate falls, it results in the reported monthly unemployment rate being lowered.

In effect, it is creating a false positive. You can see this reflected in the labor participation rate being at an all time low.

If you dissect the monthly job reports even further, you will find  that both full time and part time positions are being disproportionately created in the hospitality industry (bars and restaurants).

Labor force participation is at an historic low for the young in particular. Please refer to the graph provided by the Bureau of Labor Statistics:

3. Employment

Quantitative Easing and the Federal Reserve:

The Federal Reserve Quantitative Easing (QE) program prints tens of billions of dollars every month in an attempt to purchase treasury bonds and mortgage backed securities.

The sole intent of doing so is to artificially manipulate and lower interest rates in hopes to spur the economy.

It is already becoming difficult for would-be first time home buyers to purchase a home, what will happen if the Federal Reserve begins to taper of their QE policy, or cuts it all together?

The answer: higher interest rates.

Interest rates are still very low right now and even so it is doing very little to encourage first time home buyers to buy.

QE is artificially propping up the housing industry and artificially lowering interest rates trying to entice buyers with low rates, but again once they begin to taper or end the program rates will increase.

Again the fundamentals are not sound.

For housing to have a real sustainable recovery we need to have a strong demographic amongst first time home buyers!

 Related: Trying to Choose The Right Loan? Stop Looking at Just The Rates!

In Conclusion

The problems seen amongst first time home buyers seem to be trickling its way all the way to the top.

In fact lending has plunged to a 17 year low.

Please understand the intention of this post was not to be overtly negative or anything of that nature, but rather to touch on some of the problems facing the housing market and our overall economy moving forward.

It irritates me when I turn on the news and talking heads endlessly repeat the same incorrect facts about what is going on in the housing market, in effect being nothing more than cheer leaders for housing instead of reporting the facts.

There is no shortage in desire for American families to own a home; however, there is a shortage of the ability to do so.

Just because prices are increasing does not indicate we have an organic, natural and sustainable recovery on our hands.

Remember what happened the last time we thought home prices could only go up?

 How do you feel these obstacles will impact the housing market moving forward?

Be sure to let me know in the comments below!

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{ 11 comments… read them below or add one }

Eric Estate May 16, 2014 at 5:08 am

You are so right that first time homebuyers drive the market – but it depends a LOT on where that is – I’m in Austin, and we have lots of JOBS JOBS JOBS! Around 140 people move here every day from all over the world. Not only do they come here for all the fun things we have (F1 Races, Live Music, SXSW, Food & More), but because they can get a real, good paying job with a major Employer like Apple, Samsung, Dell, or General Motors.

I’ve noticed a huge trend that people, when coming to Austin, all follow the same thing – they want to rent for a year, to see if they really like the city, and find an area to settle down in, and then they make a purchase when the lease runs out. I market heavily to these people, and get 1-2 calls every week from past rental clients who want to take that next step to home ownership.

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Eric May 16, 2014 at 5:40 am

Demand for housing is going up, but prices will be restrained for several reasons.

Wages are not going up very fast, or not at all. Housing prices are a function of wages, and you my a monthly payment, not the total price. As long as taxes, insurance, MIP, interest etc. keep going up, prices will be restrained. Every dollar spent on these items, reduces the principal you can borrow.

Most of the very low prices are gone. Removing the lowest prices fro an average makes it appear that home prices have risen more than they have.

As prices actually rise, there is a pent up demand to sell. As more homes become above water, more homes go on the market. This puts a cap on prices.

Newer people coming into the market place, are historically more likely to be renters, not purchasers. Check the demographics of the future. They are more likely to be lower income workers. Lower income means less money for housing.

On the ‘bright’ side. If minimum wages go to $15+ per hour, a $200K house is very affordable.

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Matt May 16, 2014 at 6:12 am

So, if there’s still the desire for people to own their own homes but the supply of credit is drying up, it seems to me that lease options could gain in popularity, right?

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Dennis May 16, 2014 at 6:17 am

Easy question to answer, what if interest rates hit 10% at todays prices? A $500k house would cost twice as much to finance, locking 50% of the buyers out of the market. Why don’t people buy houses on credit cards anymore? Because the banks are giving money away for free.

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Chris Feltus May 16, 2014 at 6:21 am

Speaking of giving free money away, I just read about this in the news. The Federal Housing Finance Agency just unveiled a new plan to make mortgages easier to obtain, where have we heard this story before?
http://realtormag.realtor.org/daily-news/2014/05/14/fhfa-unveils-new-plans-make-mortgages-easier-obtain#sf2939722

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Jason May 16, 2014 at 6:53 am

Wow that hit me like a ball peen hammer! Nice work.

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Sharon Tzib May 17, 2014 at 12:32 pm

QE is one of the most misunderstood policies of our time. For a better understanding of it, read this white paper: http://pragcap.com/new-primer-on-ssrn-understanding-quantitative-easing

It has been spectacularly unsuccessful and has not created demand from consumers to obtain loans (as the all cash purchases bear out). With no demand for loans, even if QE goes away, I do not see mortgage interest rates going up any time soon. Even the FOMC’s recent meeting recap shows rates not forecasting to increase until sometime mid next year http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140319.pdf.

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Brandon Hall May 18, 2014 at 11:10 am

I agree with this information though I think there are better indicators to look at, especially when in and around large cities. I live in D.C. and one thing that scares me is that prices have been increasing by 20% per year while rents haven’t kept pace. There is rent control of course, but in general, renters are not willing to pay a higher rate for the same house whose price has been skyrocketing. That’s scary.

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Chris Feltus May 18, 2014 at 2:10 pm

For those of you interested in additional reading there was another recent article about this, take a look here: http://libertystreeteconomics.newyorkfed.org/2014/05/just-released-young-student-loan-borrowers-remained-on-the-sidelines-of-the-housing-market-in-2013.html#.U3kTgfldV1F

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Chris Feltus June 26, 2014 at 2:11 pm

Here is a recently published video from NAR itself regarding this specific issue (student loan debt, first time home buyers and the impact on the overall housing market), its worth a watch for certain.
http://bit.ly/1pERXnB

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Chuck McGlothlin August 10, 2014 at 10:55 am

All good information but one fundamental was not discussed and that is the overall picture for the Fed. As Uncle Sam has been on an accelerated spending benge he’s run up debt in the mega trillions. The only way he can continue to make payments or service that debt is to keep interest rates low or else he’s only paying interest with no chance of making the principle and risking default. I.e. buying time until the economy gets better. That will be a long term situation as they repeatedly indicate the intent of keeping interest rates low. QE may end but low rates are far into the future.

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