MIAMI — Given that mortgage rates continue to hover around historic lows and we’re seven years out from the housing bust, the housing market should be booming — but it isn’t.
That’s according to economists who spoke Friday on a panel at the National Association of Real Estate Editors (NAREE) conference.
Things are getting better, they said. Frank Nothaft, chief economist for real estate data and technology firm CoreLogic, expects a 5 percent gain in home sales next year and noted that consumer confidence is at its highest level in eight years.
National Association of Realtors Chief Economist Lawrence Yun anticipates home prices will return to their 2006 peak sometime this year, though home sales will remain 25 percent below peak. Nothaft was not quite so optimistic, pegging a return to 2006 house prices by the end of 2017.
Yun predicted that even if the Federal Reserve begins to raise interest rates this year, we may see only a “slight budge” in 30-year mortgage rates because rates have not been rising and falling in tandem.
But the economists named several factors that are still hurting the housing market:
1. Low inventory: Negative equity continues to hold back potential sellers. About 5 million people continue to owe more on their home that it’s worth, and another 1 million have a tiny bit of equity but not enough for a down payment on a next home, Nothaft said.
That negative equity is concentrated in the lowest price tier of the market — the tier that is most likely to be affordable to first-time buyers.
“The bottom one-third of housing stock is three times more likely to be underwater than the top one third,” said Zillow Chief Economist Stan Humphries.
Homeowners are also reluctant to give up the rock-bottom mortgage rates many of them refinanced into not long ago, Nothaft said.
Also on the supply side, homebuilders are not having any trouble selling their spec homes, but smaller builders are having trouble obtaining construction loans, according to Yun.
“The big guys can obtain money from Wall Street. Smaller guys depend on community banks” that are struggling, he said.
Low inventory also perpetuates itself: Existing homeowners fear selling their home because they’re not sure they’ll find a home to replace it, said David Crowe, chief economist for the National Association of Home Builders (NAHB).
2. ‘The rent is too damn high’: Crowe said he expects the market to be much better next year as millennials — potential first-time homebuyers — “finally” start getting married and having children and their unemployment rate inches down.
But Humphries was less sanguine. Household formation is beginning to go up, he said, but “overwhelmingly the households we have been forming have been renting households, not owning households.”
Those kids moving out of their parents’ basement are not going to go buy a home; they’re going to rent — at least initially, he said.
Rents are now rising faster than home prices (4.3 percent vs. 3 percent in the last month), according to Humphries.
“Rents have never been less affordable,” he said. “It’s a broad-based problem affecting every single metro.”
That’s a problem because “today’s renters are tomorrow’s buyers” and renters are being squeezed, according to Humphries. A recent Zillow survey asked renters what they gave up because they had to pay more toward rent.
“The first thing to go is dental care, followed by seeing a doctor, then prescription drugs. It’s not pushing out your cable bill or dinner out with friends, but rather some basic things in a household budget,” Humphries said.
There’s been a big increase of single-family homes in the rental stock, Nothaft said.
“Between 2006 and 2013, 3 million single-family homes moved from owner to renter. That’s about a one-third increase in the single-family detached housing stock that are for rent. Single-family represents 40 percent of the rental stock in the U.S.” he said.
3. Continued tough underwriting: “Underwriting standards are a lot tighter today than in the late 90s or early 2000s,” Nothaft said.
Yun sees hope in this area as FICO develops new credit scoring methods, Fannie Mae and Freddie Mac begin offering lower down payment products, and NAR pressures the Federal Housing Administration to lower FHA premiums.
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