There are 5 simple and obvious reasons why the financial media and housing pundits got it wrong in terms of demand for home purchasing and year over year growth in existing home sales in 2014.
- Lending standards are not too strict
First, since none of these pundits have any financial lending experience they all naturally assumed that lending standards would ease making demand grow. It was painful to watch Steve Liesman on CNBC try to make a case to Diana Olick that if lending standards eased it would stimulate demand. Sadly, this is a misconception held many in the financial media and Wall Street firms. Mortgage standards are not overly rigorous in America. In fact, all you need to buy a home in America is a 620 fico score, 3.5% down payment and a debt to income ratio of not greater than 43%. Once this is recognized, the real problem, no wage growth and the lack of good paying jobs, will become the focus of how to grow the housing market.
Courtesy of Professor Anthony Sanders
- Housing internals are weak
Second, those housing pundits tend not to consider the “internals” of the housing market. The internals tell the story for those who care to look.
In a normal cycle we would see the following:
90% mortgage buyers
40% of that first time home buyers
10% cash buyers
In this cycle, however we see the following:
67-70% mortgage buyers
27-30% first time home buyer
30% plus cash buyers for the past several years
The internals show weakness in demand, not strength. What if the number of cash buyers returned to a normal 10% level of the market place? 2014 has a high percentage of cash buyers but the volume of sales are going down. With a lower percentage of cash buyers expected in the future, the number of mortgage buyers will need to increase just to maintain the current level of sales.
- Too many low paying jobs
Also consider that this economic cycle has had a very weak income jobs recovery profile. In layman’s terms this means that the majority of the jobs recovered have been low wage jobs going to people 50 and over. The Debt-to-Income (DTI) and Liability-To-Income (LTI) metrics for home buyers are still high even though interest rates are low because wages are low and savings have been exhausted — hence the very soft demand for mortgages. The affordability index used by most of the financial media and Wall Street firms are terribly flawed because they assume everyone in America can make a 20% down payment. These days only the rich can come up with a 20% down-payment. In my business I am also seeing signs of economic stress in the would-be move up buyers. Many homes may no longer be underwater but the amount of equity is still generally small so there are fewer dollars available for the next purchase.
Home prices are too damn high!
The term “housing recovery” suggests that home prices are now “returning to normal”. In truth however, prices are rising beyond economic reality of most Americans. While home owners and housing pundits alike were glad to see the return of home values to nearly pre-recession levels in some areas, nary a thought was given to how to how this would impact demand. Prices were up 15%-45% in 2 years — the biggest 2 year expansion we have seen outside the bubble years. While we are seeing some price reductions, there really isn’t any meaningful way to get a price correction in the market until inventories increase or there is another a job loss recession. One of the best things that could happen to the housing market would be a major cooling of prices from the crazy pace we have been seeing in the past 2 years. Nevertheless, I expect home prices will continue to show growth for 2014.
5. New home sales only account for 10% of the market
For years I have been saying that housing starts and sales will rise in the new home sale sector because the 80% correction it had in this cycle. And while this is true, new homes are only 1/10th of all home sales and tend to be for the more wealthy buyer. Housing inflation for new homes sales is well over the peak of the 2006 bubble in terms of median income to median prices. Growth in that sector is being carried by the wealthy. For the less wealthy home buyer, builders are competing with traditional (resale) homes which often provide a much better value. Therefore significant growth in the new home sector will be limited.
In short the housing bulls didn’t have the sophistication to know why things were soft; In a “real” housing recovery housing demand would grow by demand from main street America and mortgage buyers not from cash buyers. Even with mortgage rates below 5% since early 2011, zero interest rate policy by the Fed, and cash buyers being 30-35% of the homes bought, we are still going to finish 2014 as a negative year over year in home sales.
So to all the housing bulls who still believe there is growth coming in 2014, I ask you what kind of Housing Nirvana are you smoking. This doesn’t mean a housing collapse but also doesn’t mean growth in the housing sector for main street America. The only growth left this year are in new home sales and that is being held up by the wealthy buyers, not first time home buyers. Once main street America gets paid, then you will see a real recovery in housing.
Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com and contributor for Businessinsider.com