Our recent experiences in Washington, D.C., confirm that homeownership is clearly a value that is promoted by most politicians. They are in for a rude awakening, however, and a legacy that they will not be proud of.
Eight million homeowners are currently not paying their mortgage, and we believe 6 million of them will lose their home to the bank in the next two years. This will reduce the homeownership rate to 62 percent, as follows:
According to a recent study, another 5 percent of all households, which roughly equals 5 million additional homeowners, have no equity in their home. This suggests only 57 percent of U.S. households own a home with equity value. If you believe that many will strategically default, this will push homeownership even lower.
Here are the many variables that will affect homeownership over the coming years:
- Aging demographics — If we built a fence around the U.S. and did not let immigrants in, homeownership would go up due mostly to the fact that homeownership rises as you age.
- New households — Every year, millions of young people reach the age where they leave their parents and go out on their own. This far exceeds the households lost to death. The actual numbers cycle with the economy, however, as they won’t leave if they can’t find a job or can’t afford housing.
- Great affordability — Approximately 58 percent of homeowners can afford the median-priced home vs. 45 percent historically (assuming a 31 percent front-end debt-to-income ratio and a 95 percent loan-to-value ratio). Affordable housing and generous mortgage terms impact housing greatly.
- Social policy — Elected officials seem to be very much in favor of high homeownership because it builds equity and provides neighborhood stability. While that’s correct in theory, they need to balance that goal with the fiscal reality that not everyone is financially responsible enough to save some money for a down payment and to make their mortgage payment every month!
- Immigration — Immigrants tend to rent first before buying. A rule of thumb is that immigrants spend an average seven years as renters before becoming buyers. The higher the volume of immigration, the lower the homeownership rate.
- Lending policies tightening — Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) have tightened standards, but it is still much easier than usual to get a mortgage. For most of the last 50 years, 20 percent down payments or 10 percent down payments with mortgage insurance, 32 percent front-end and 40 percent back-end debt to income ratios were the norms. Fannie and Freddie will still buy loans in some states over $700,000. Fifteen years ago, the maximum was only $203,000. Thanks to government mandates to get more aggressive, mortgages have become much easier to obtain, with default risks borne by the taxpayer.
- Defaults — As mentioned above, 8 million homeowners are not paying their mortgage, and this number grows every day. The loan modifications have little prayer of helping, primarily because so many of these consumers have too much additional debt. As an example, the homeowners who have received permanent modification pay more than 30 percent of their income to service debt that is not their mortgage.
Today, the official homeownership rate stands at 67.1 percent — back to a level consistent with early 2001. Now that the economy has slowed much more than expected, consumers have moved back to the sidelines (despite the fantastic interest rates and affordability). Adults with incomes can afford to buy homes, and we have 7.4 million fewer adults with incomes today than we did at the peak in 2007.
- We collect a complete history on 70-plus variables and forecast the important ones by forecasting each metropolitan statistical area (MSA) and rolling it up.
- Each indicator is graded based on a bell curve where an “A” is its historical best, a “C” is its historical average, and an “F” is its historical worst. The grades are designed to provide a simple tool for decision-makers to scan the data.
- Each of the eight categories has a grade that is nothing more than the average of the grades under it.
Economic growth: D+
The economic growth data improved slightly this month, although we are seeing signs that the economy is slowing, which will show up in the data releases in July and August. Retail sales and personal income growth continued to increase on a year-over-year basis, and year-over-year job losses continued to ease. First-quarter real U.S. real gross domestic product grew 2.7 percent, which is down from 5.6 percent last quarter.
The unemployment rate decreased this month to 9.5 percent, and the broader measure of unemployment, the U-6, decreased to 16.5 percent. (According to the Bureau of Labor Statistics, the U-6 includes two groups that the U-3, which is the typical unemployment rate, does not: “marginally attached” or discouraged workers, and those employed on a part-time basis for economic reasons.)
The length of unemployment in the labor force increased to 34.4 weeks this month, which is a new record high since the U.S. Bureau of Labor Statistics began tracking the statistic in 1948. Personal income growth improved for the fifth consecutive time since December 2008, increasing by 1.6 percent. The Consumer Price Index (all items) decreased to 2 percent from 2.2 percent last month, while the Core Consumer Price Index (minus food and energy) held steady at 0.9 percent compared to last month.
Leading indicators: C
The Economic Cycle Research Institute (ECRI) Leading Index — an indicator of future U.S. growth — decreased this month compared to the previous month, and the yearly growth rate remains positive but has slowed to 7.9 percent year-over-year growth.
Stocks declined this month, with the S&P 500 down 5.4 percent. All four major indices have still experienced large positive year-over-year growth, ranging from 12 percent to 16 percent. The S&P Homebuilding Index got hammered this month, declining 18 percent, as weaker than expected homebuilder orders and CEO commentary made investors quite skittish.
The spread between corporate bonds and the 10-year Treasury note narrowed this month, decreasing to 167 basis points (a basis point is one-hundredth of a percentage point) and is well below the peak of nearly 270 bps in March 2009 as Wall Street has become less worried about businesses failing over the past year. Business credit availability remains poor overall, but conditions are slowly improving.
Affordability continues to be excellent as mortgage rates and median home prices throughout the country remain extremely low. Our housing-cost-to-income ratio ticked up just slightly to 26.2 percent, but housing affordability remains excellent compared to history. Affordability is so good that owning the median-price home is only $64 more expensive than renting the average apartment.
Household income has fallen 3.6 percent year-over-year to $53,678 as a result of large job losses and government furloughs. The median-home-price-to-income ratio ticked up to 3.3 and is now equal to the historical average. The 30-year fixed mortgage rate decreased to 4.69 percent this month, while adjustable mortgage fell to 3.77 percent.
The Fed’s overnight lending target rate remained at a range of 0.00 percent to 0.25 percent, which is the lowest level on record. The share of adjustable rate mortgage applications decreased to 4.9 percent this month, but is still significantly less than the peak level of 35 percent of total applications in early 2005.
Consumer behavior: D+
Consumer behavior improved slightly this month as several metrics trended upward. Consumer sentiment increased slightly to 76 but remains well below the historical average. The Consumer Confidence Index decreased to 52.9, and is still at a very, very low level.
The credit outstanding per household has fallen 9.9 percent over the last year to $7,498 per household. The personal savings rate ticked up to 4 percent, but is still down from the recent peak of 6.9 percent in May 2009.
The Misery Index decreased this month, falling to 11.7 from 12.1 the previous month. This was the result of a slight decrease in both the unemployment rate and the inflation rate.
Existing-home market: D+
The existing home market worsened slightly this month as sales volume and purchase mortgage applications declined now that the federal tax credit has expired.
The seasonally adjusted annual resale activity dropped to 5.66 million homes this month, according to the National Association of Realtors (NAR), but has still increased 19 percent year-over-year, albeit from low levels. On a rolling 12-month basis sales have improved for twelve consecutive months, increasing 0.7 percent compared to the previous month and 16 percent year-over-year.
The national median price of an existing single-family home ticked up to $179,400 currently from $172,500 the previous month, and the median price has increased 2.7 percent year-over-year.
The Standard and Poor’s/Case-Shiller U.S. National Home Price Index improved drastically, and has returned to positive territory this quarter for the first time since late 2006, increasing 2 percent year-over-year. The number of unsold homes decreased slightly to 8.3 months of supply, which is above the historical average.
Pending home sales decreased sharply this month to the lowest level on record due to the expired tax credit. Approximately 24 percent of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New-home market: C-
Overall, the new-home market worsened this month as sales activity decreased sharply. Builder confidence declined to 17 from 22 last month, which is due in part to a decrease in sales as a result of the expired federal tax credit.
The seasonally adjusted new home sales volume has fallen 19 percent year-over-year to 300,000 transactions, which is the lowest level on record dating back to 1963. However, the sample size used by the Census Bureau to calculate this metric is extremely small and the confidence interval is quite large.
The rolling 12-month total still climbed this month to 384,000 transactions, but remains near historically low levels.
The median single-family new home price decreased to $200,900, and has dropped 9.6 percent year-over-year. The inventory of unsold homes increased sharply this month to eight months of supply, but the volume of new homes for sale dropped slightly to 213,000 homes.
Repairs and remodeling: C-
Conditions for residential repairs and remodeling are slightly better this month, with multiple metrics improving recently. Homeowner improvement activity declined 6.7 percent year-over-year. The Remodeling Market Index increased sharply this quarter to 47 from 36.4 the previous quarter. In addition, the index has ticked up just above the historical average of 46.6.
Private residential construction has increased year-over-year for the third time since June 2006 this month, increasing 11.2 percent.
Housing supply: F
Housing supply worsened slightly this month, as new home completions, starts, and permits all decreased. Total completions declined to 687,000 units this month, as builders have reduced construction activity now that the federal tax credit deadline has passed.
Seasonally adjusted new-home starts also decreased this month, due to a decrease in single-family starts. Seasonally adjusted total permits decreased to 574,000 this month, which is a 6 percent month-over-month drop, but permits have still increased 4 percent year-over-year.
Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just five states in the U.S. are currently undersupplied — Oklahoma, New Mexico, North Dakota, Montana and Alaska. The homeowner vacancy rate decreased this quarter to 2.6 percent, which is down from 2.7 percent last quarter.
Copyright 2010 John Burns