Is Economic Pessimism Holding Back the Housing Market?

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While we’ve seen a rapid rebound in the market, and some steady gains in recent months, home buying and overall growth in the property sector has remained tepid.

Since the start of 2014, we’ve seen either flat growth or monthly year-over-year sales figures that undershoot what was recorded in 2013. This is worrisome on a handful of counts, one of them being that stagnancy could cause fluctuations in property sales down the line.

The other concern is that slow home sales could cause a restriction in available property that spikes home sales further, causing even slower property sales in the coming months.

That being said, it seems that much of the unease in the housing market can be traced back to a root cause.

Chilling Effect of Widespread Pessimism

As a recent Los Angeles Times report points out, widespread pessimism about the state of the American economy overall has produced a chilling effect across the housing market.

A recent survey from Fannie Mae disclosed that a full 57% of those polled felt that the U.S. economy is heading in “the wrong direction”.

Related: U.S. Housing Market Hits a Rut

Overall, pessimism around home affordability seems to be mounting. The same report that the Los Angeles Times cited points out a growing belief that homes will become less valuable in the coming months.

Only 48% of those polled (down from 50% in April) believe home prices will increase within the coming year, and a full 7% expressed certainty that home prices would drop. W

hile the 7% figure might seem meager compared to the 48% who estimate that home prices will rise, that also measures as the highest proportion of polled responders within the past year who expected home prices to drop.

So What to Make of This?

Granted, this is far from a doom-and-gloom scenario.

Sluggish sales and purchase slowdown are a far cry from an outright housing crash, and it’s not a completely damning set of data. The amount of those polled who believe it’s a responsible time to sell their house is sitting at 43%.

Despite gut-level responses around whether or not it’s a good time to sell or buy, or whether home prices will rise, much homebuyer hesitancy remains tied to the greater economy. The report quoted in the Los Angeles Times projected that net home sales in 2014 will hit well below what was recorded at the close of 2013.

Throughout the housing purchase boom of 2013, there were persistent questions of whether or not the strength in the buying market would continue for the foreseeable future.

More prescient analysts suggested that the purchase boom would run out of steam if the economy didn’t pace a quick rebound as well. The first wave of major purchases seemed motivated by consumer confidence and a belief that we wouldn’t be experiencing a second bubble, but a lukewarm economy overall hasn’t helped sustain it.

Related: Housing Recovery Is Helping Consumer Economy

It’s likely that one of the most reliable ways for home sales to pick up would be a corresponding rebound in employment figures and median family income.

Do you think this will happen?

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About Author

Harrison Stowe is a writer for NVR Inc., a prime developer of Baltimore new homes. Addressing a range of topics including investing, mortgages, and real estate, Stowe combines finance knowledge with additional experience working with Ryan Homes in the current real estate market.

5 Comments

  1. What is holding back the housing market is wage growth. Housing is a function of monthly payments, which equates to wages. Prices cannot go up if people cannot afford more.

    When markets are not raising fast, banks have to be very careful who they lend money to. When we have 20%+ price appreciation, banks can take a lot of defaults, and still make money.

    In the old days (prior to 2007), banks had the attitude Who cares of the person doesn’t pay back the loan, the asset is making us money. And they did make money, even on foreclosures.

  2. As they say, all real estate is local. America is also a huge country, and covers many different demographics that need to be looked at. Over all, the country is still struggling financially. There are a few pockets, such as here in Orange County, CA that are economically strong, with low unemployment, high wage earners, and a broad based economy. However; areas such as this are few and far between. Some of the cities in Orange County have YOY prices that are up 17%., and the housing markets are rebounding.

    “The new normal” will take quite some time to adjust to for everyone. We have to watch our local markets (or whatever market you are investing in) very carefully and be sensitive to the changes. Assuming that things are going to bounce back and be the same, that consumers are going to go back to viewing real estate as a great investment for their retirements, etc. would be a mistake. Decisions need to be made on the current reality in your area.

    Also, the banking regulations have greatly affected a large swath of people. Tyler Perry has a new documentary (Spent) that discusses the massive number of people that are no longer part of the banking system due to a variety of things, some very minor.

    For myself, I am very comfortable with the outlook here in Orange County, CA. Though prices here may be high, they are lower than they were. However; I expect they will continue to gain value due to all the things I mentioned above, along with the perfect year round weather, and all the great things available here. It’s all about location, location, location!

  3. Behind the job and wage growth issues Eric and Karen mentioned there are serious monetary headwinds that the Fed is fighting. While most expect that interest rates ‘have’ to rise the Fed is trapped holding them low in the hope that lending and real estate will recover leading to a recovery in consumer spending which is 70% of the US economy.

    For the how and why of this see the video presentation and charts from Stephanie Pomboy of MacroMavens in my BP blog post here: http://www.biggerpockets.com/blogs/5055/blog_posts/38149-are-poor-expectations-killing-the-housing-recovery

    Good hunting-

  4. Jeff Brown

    Harrison — My guess is as good as anyone’s, but another factor in the near term future that may significantly affect values, is the inventory of foreclosed homes mostly playing itself out by the end of next year. That major supply source, less major lately, of course, would lower the supply. Assuming demand stays flat or rises, that would necessarily mean higher prices. Sales? Another story altogether, right?

  5. I began selling my properties in 2006 which due to economic developments outside of real estate. These economics were responsible for that bubble to begin with (Federal Reserve policy, securitized lending, etc) . The most reliable indicator then and I believe now are two ratios, price to income and price to rent. This data can be found for all regions of the US. While it’s great to be optimistic I would examine these first before incorporating that optimism into my business model. What you will find, I believe, is that once again price to rent and price to income have risen out of their historical norm. In 2006 they were two standard deviations above their historical norm. Where are they today for your area?
    don’t get me wrong, I have begun buying again but with little to no expectation of near-term appreciation.

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