Logan Mohtashami, Benzinga Contributor
At the recent Chicago Booth Conference in Los Angeles, Professor Amir Sufi and I had an opportunity to discuss his excellent new book, House of Debt, which lead to a further discussion on why housing has been soft for years. Three points are worth repeating.
First, even though interest rates have been low for a long period, mortgage buyers financial profiles aren’t strong. Unlike during the housing bubble and tech bubble of the last 2 cycles, our economy has not generated decent wage jobs — rather we have seen a growth in low wage service jobs. This is one of the major reason why housing has been much weaker in this cycle, even with the starkly lower rates. Without a third financial bubble to create fake demand for fake good paying jobs, our capacity for growth in the housing market is limited.
Second, consider the effects of my proverbial “four horse men of housing– “Globalization, Technology Demographics and Debt. These four economic forces have contributed to wage deflation for middle and lower class Americans. In certain sectors, technology has enhanced wages for those at the top while eliminating jobs at the lower end. Net asset inflation has also been a boon for capital gains income (again, preferentially helping those at the top) while low-interest rates are preventing cash savers from earning anything . While this housing cycle is strong with cash buyers, it lacks mortgage buyers. My original thesis on housing still stands;; we simply don’t have enough qualified home buyers once you x out the cash buyers.
Third, although wage inflation for most Americans has been nonexistent, housing inflation is artificially high. Consider that we have seen a 15%-45% rise in home prices in the last 2 years, concurrent with a parabolic rise in student loan debt since 2007. Wage growth on the other hand, is barely over 2%, below rent and housing inflation. People who complain that lending standards are holding housing back simply have forgotten math
We cannot expect new home construction to bolster the economy like it did in previous economic cycles. Construction while growing is going to be light in the near term because we over built during the period when we thought every American should own a home. While homes were sold to “anyone with a pulse”, many of those purchasers did not have the capacity to carry that debt burden. Rightly so, lending standards have gone back to normal so those unqualified buyers are not coming back. Nor should we tempt them to do so or ease standards to allow them back into the housing market. As a country we will have a good size demographic group ages 20-35 that will naturally be renters not buyers. So, the recent demand we have seen in multifamily construction from the builders is warranted
The Chart below from Professor Anthony Sanders clearly shows a lack of income is the real problem, not tight lending standards.
Remember a big portion of the jobs recovered following the recession were from the low-level service jobs sector which does not generate the income needed to support mortgage debt. We have gone from 18% to 3.25% mortgage rates and yet we have more buyer stress at 3.25%-4.25%. Today we have a housing affordability crisis for the rental market due to a lack of wage growth and decent base salaries. So, it will be obviously much more difficult for Americans, barring the rich and very strong middle class, to own the debt of housing. The reasons have more to do with economics than the myth that lending standards are too tight.
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