Keeping Housing from a Real Recovery

Fritz Pfister
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Posted: Apr 30, 2013 12:01 AM

You have heard time and again that housing is a bright spot in the economy and is helping lead America back to recovery. Housing should be a part of any recovery, one out of four jobs in America is tied to housing.

In March existing home sales fell 0.6% to an annualized rate of 4.92 million. A decade ago when we had fewer families, 6.2 million sales were considered healthy. The media blamed the decrease in sales on low inventories and excessively tight lending standards.

Since 1971 thirty year mortgage rates have fallen below 4% in only 16 months (out of 504), the preceding 16 months. One would think inventory would be tight because homes should be selling as fast as they come to market. Not this time, because it’s different. You have to have a job to qualify for a home loan regardless the interest rate.

These historically low interest rates are causing several unintended consequences.

The first contributes to the low inventory, refinancing.

Are consumers scared? The Thomson/Reuters University of Michigan Consumer Sentiment Index fell to a three month low in April after the Consumer Confidence index fell to 59.7 in March, the lowest since August of 2011. Families who are scared about the economy are refinancing to lower their costs to weather the storm.

People who go to the expense of refinancing, who are scared about the economy, aren’t going to be adding to the inventory of homes for sale. These are the good homes that are in demand, not the beat up foreclosures the too big to fail banks are withholding from the market to drive up prices.

The second consequence from record low interest rates is that in normal economic times families would sell every five to seven years. When interest rates rise, anyone with an interest rate below 4% won’t sell unless they must. Future inventories will then be negatively impacted.

Another consequence of these rates is that they are driving the majority of demand. The sales that are occurring are not due to job growth leading to new family formations needing housing, they are the result of pent up demand drawn to the market.

Pent up demand is not infinite. When that becomes satisfied demand will collapse unless there is a jobs boom.

Existing home sales running at 80% of healthy should not be translated as a recovery.

The media is correct regarding tight lending standards. No one is calling for going back to the sub-prime days, except Holder threatening inner city banks for not making enough loans to minorities again. The Dodd-Frank financial reform law is preventing loans for buyers who would normally qualify, especially owners of Sub S small businesses.

As important as existing home sales are to recovery, the new home market is more important. Land sales, engineers, heavy equipment manufacturers, building materials, laborers, skilled trades industries thrive during healthy building cycles.

The rate of new home sales at 416,000 is one third from the peak proving there is no recovery in the new home construction business and explains why 70% of construction workers remain unemployed.

Don’t be misled by CNN who said a building milestone was reached with 1.036 million starts, or USA Today’s headlines that housing starts take big jump in March. The jump was due to multi-family starts while single family starts declined 4.8% to 619,000. In normal economies 1.2 million starts is considered healthy.

The more evidence we are becoming a nation of renters, and not by choice. We are on pace for multi-family building to out pace home construction for the first time in our history.

What is preventing a recovery in new home construction with this cheap mortgage money? In a word, government.

EPA green building standards, erosion control rules, new OSHA labor rules, and rising costs of materials due to the debasement of the dollar at the hands of the Bernanke printing press has priced new homes out of the range of all except the wealthiest of Americans.

The big boys traded on Wall Street are surviving due to their bulk purchasing power and deep pockets, but the small home builder, the backbone of America’s building industry, has become an endangered species.

A sustainable recovery in the housing market has been, is, and will be dependent upon full time job growth leading to new family formations creating demand for homes.

What is preventing a real housing recovery? The lack of jobs. What is preventing job creation? Government.

The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield or RE/MAX International.