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.
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.
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.
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:
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!
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!