Higher costs de­flate re­vival of home sales

The Washington Times Weekly - - National - BY PA­TRICE HILL

The na­tion’s bat­tered hous­ing mar­ket, one of the last sec­tors to join the re­cov­ery, is fal­ter­ing again in the wake of ris­ing in­ter­est rates, rais­ing fears that it once again may drag down the rest of the econ­omy.

New and ex­ist­ing home sales in March were down by 13.5 per­cent from their peak nearly a year ago, cool­ing the rise in hous­ing prices that, dur­ing a brief spurt last year, grew by more than 12 per­cent on aver­age.

Econ­o­mists say the nearly 1 per­cent­age point jump in 30-year mort­gage rates spurred by Federal Re­serve pol­icy over the past year has com­bined with fas­tris­ing home prices to make hous­ing less af­ford­able for the aver­age con­sumer, who continues to be pinched by limited wage gains and im­paired ac­cess to credit. More­over, first-time home­buy­ers, a group that plays a piv­otal role in pro­pel­ling hous­ing growth, have been in short sup­ply be­cause of high un­em­ploy­ment rates and bloated stu­dent loan debts among the mil­len­nial gen­er­a­tion.

“The sub­stan­tial in­crease in the cost of be­com­ing a home­owner is hurt­ing hous­ing in a non-triv­ial way,” said Tom Por­celli, chief U.S. econ­o­mist at RBC Cap­i­tal Mar­kets, who es­ti­mates that the cost of own­ing a home has gone up by 22 per­cent in the past year.

Federal Re­serve Chair Janet Yellen last week cited the threat of a re­lapse in hous­ing as a prin­ci­pal con­cern of the cen­tral bank. Af­ter the Fed an­nounced a year ago that it would slowly with­draw stim­u­lus from the econ­omy, hous­ing sales dropped 10 per­cent within months.

Hopes that hous­ing would re­gain mo­men­tum this year amid a broader eco­nomic re­cov­ery have been dis­ap­pointed. Re­ports show the hous­ing slump con­tin­ued, and even deep­ened, dur­ing the nor­mally busy spring.

A Fed sur­vey last week showed that banks have pulled back mort­gage lend­ing in re­cent months to a level not seen since 2010, fur­ther rais­ing hur­dles for home­buy­ers.

Banks, stung by huge losses on de­faults dur­ing the hous­ing and credit cri­sis, have been tar­get­ing buy­ers with credit scores in the near-per­fect range of 750 to 800 and have been spurn­ing al­to­gether about 25 per­cent of as­pir­ing home­buy­ers with credit scores be­low 600, an­a­lysts say. As a re­sult, mort­gage lend­ing dur­ing the first quar­ter was at its low­est level in 14 years.

With de­mand for hous­ing loans “painfully weak,” Mr. Por­celli said, he ex­pects hous­ing to con­trib­ute 0.1 per­cent or less to eco­nomic growth this year, af­ter pro­vid­ing dou­ble-digit gains in 2012 and 2013.

Mid­dle class left be­hind

With mid­dle-in­come home­buy­ers get­ting short shrift, James J. Pu­plava, chief in­vest­ment strate­gist at PFS Group, said the mar­ket is in­creas­ingly dom­i­nated by wealthy home­buy­ers and in­vestors who have the money and strong credit rat­ings needed in to­day’s mar­ket.

Un­like mid­dle-class wage earn­ers, who have barely been able to keep up with in­fla­tion be­cause of stag­nated earn­ings since 2008, wealthy home­own­ers and in­vestors are flush with in­come and cash thanks to su­perla­tive gains on their hold­ings in the stock mar­ket. Pur­chases of homes cost­ing $1 mil­lion or more have surged by 7.8 per­cent in the year end­ing in March, ac­cord­ing to the Na­tional As­so­ci­a­tion of Real­tors, while home pur­chases of $250,000 or less, which rep­re­sent al­most two-thirds of the mar­ket, plunged by 12 per­cent.

“The hous­ing re­cov­ery is mir­ror­ing Amer­ica’s wealth di­vide,” Mr. Pu­plava said. “Mil­lion-dol­lar homes in the U.S. are sell­ing at dou­ble their his­tor­i­cal aver­age while mid­dle-class property de­mand stum­bles.”

Mid­dle-class buy­ers also are com­pet­ing with well-heeled in­vestors for lower-priced homes in many mar­kets, as in­vestors snap up prop­er­ties they can fix up and rent at profit.

As first-time home­buy­ers and mid­dle­class fam­i­lies scram­ble to se­cure loans to buy lower-end prop­er­ties, in­vestors of­ten do end runs around them by pay­ing in cash.

“While in­vestors drain the mar­ket of lower-end prop­er­ties, builders are [cater­ing to the wave of af­flu­ent buy­ers by] con­struct­ing more ex­pen­sive houses that gen­er­ate big­ger profit,” Mr. Pu­plava said. That com­bi­na­tion is “putting home­own­er­ship out of reach for many Amer­i­cans,” es­pe­cially in high-priced res­i­den­tial ar­eas on the East and West coasts.

Dearth of first-time buy­ers

In nor­mal eco­nomic times, a steady flow of first-time buy­ers would be pro­vid­ing a pow­er­ful boost to the mar­ket. Since the Great Re­ces­sion, though, young adults have been held back by dou­ble-digit un­em­ploy­ment and a cu­mu­la­tive stu­dent debt load to­tal­ing over $1 tril­lion. That has forced many mem­bers of the mil­len­nial gen­er­a­tion to post­pone home pur­chases and con­tinue liv­ing with their par­ents or other rel­a­tives.

The pro­por­tion of 18- to 34-year-olds liv­ing with their par­ents has jumped to 31 per­cent from 27 per­cent be­fore the re­ces­sion, ac­cord­ing to the Cen­sus Bureau. Along with other fi­nan­cial ob­sta­cles, that drove the share of first-time buy­ers in the mar­ket to a record low of 26 per­cent this year, down from 40 per­cent in pre­vi­ous years, ac­cord­ing to the Na­tional As­so­ci­a­tion of Real­tors.

The scarcity of first-time buy­ers has pre­vented the chain re­ac­tion of linked sales that fu­els hous­ing growth, said real es­tate an­a­lyst Barry Ritholz. Own­ers of starter homes find it more dif­fi­cult to find buy­ers and trade up.

More­over, mil­lions of own­ers have no eq­uity in their homes be­cause they bought at the height of the hous­ing bub­ble in the mid-2000s or have so lit­tle eq­uity that they can­not trade up to more ex­pen­sive homes with­out putting down additional cash, mak­ing them re­luc­tant or un­able to of­fer their homes for sale.

That has led to a para­dox of too few houses on the mar­ket, cre­at­ing bid­ding wars on prop­er­ties and putting prices fur­ther out of reach for first-time and credit-con­strained buy­ers, Mr. Ritholz said.

“Be­yond the first-time buy­ers, there are prob­lems with the links in the home­selling chain,” he said. “As house­holds have been delever­ag­ing from the mid2000s credit binge, they also have main­tained a low sav­ings rate. Com­bine that with rel­a­tively low house­hold eq­uity — as well as no-eq­uity and un­der­wa­ter house­holds — and you end up with a hous­ing mar­ket that lacks a cru­cial in­gre­di­ent for a ro­bust re­cov­ery.” Eco­nomic growth at stake Even so, many econ­o­mists hold out hope that the hous­ing mar­ket will re­sume growth this year and con­tinue to bol­ster the econ­omy. Hous­ing growth his­tor­i­cally has been an es­sen­tial in­gre­di­ent for ig­nit­ing and main­tain­ing eco­nomic ex­pan­sions in the U.S.

“The im­por­tance of hous­ing on the broader econ­omy shouldn’t be

AS­SO­CI­ATED PRESS

Home­own­ers look­ing to trade up are hav­ing trou­ble find­ing buy­ers. Mil­len­ni­als and mid­dle-in­come Amer­i­cans are find­ing the cost of own­ing a home out of reach and are in­creas­ingly hav­ing to com­pete with wealthy in­vestors for houses within their price range.

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