Housing market is slumping in a booming economy: Why?
More more sellers home and are finding they must reduce asking prices to find a buyer.
These should be happy times for the housing sector. The economy is booming, with more people working at higher pay, and with the sizable millennial generation reaching prime homebuying age.
Instead, the housing market has gone soft, acting as a drag on the overall economy rather than as a force propelling it forward.
Sales of new single-family homes were down 22 percent in September from their recent high in November 2017, and existing home sales in September were down 10 percent. This tepid residential investment subtracted from GDP growth in each of the first three quarters of 2018.
Home prices have not declined nationally, at least according to the most widely followed indexes. But their rate of increase has declined, and more and more home sellers are finding they must reduce asking prices to find a buyer.
Given how central housing is to the broader economy — it is the biggest driver of both wealth and indebtedness for most families, and its fluctuations have frequently been major factors in past booms and busts — this slump isn’t something to be taken lightly for anyone hoping the good times will last. So what’s going on? When you look closely at the data, it appears this paradox of a strong economy and a weak housing market is, at its core, an illustration of a fundamental rule in economics: If something can’t go on forever, it won’t.
Home prices in a given location are ultimately tethered to the incomes of the people who either live there or want to. But for much of the past six years, that relationship has come undone.
Nationally, personal income per capita has risen 25 percent since the end of 2011, while the S&P/CaseShiller national home price index is up 48 percent (neither figure is adjusted for inflation).
Those rising home prices got help from years of very low mortgage rates, which put more expensive homes within reach for people at a given income level. Activity was also probably boosted by some bounce-back effect after the housing market crash of 2007-09, a result of pentup demand for homes that were not bought while the market was collapsing.
Rates bottomed out in late 2012 at 3.31 percent for a 30-year fixed-rate mortgage. They have been moving upward in fits and starts since, including a full percentage point in the past year alone to nearly 5 percent — still low by historical standards, but high compared with the ultralow levels that had enabled these huge price gains.
There’s no doubt that demographics are favorable for housing demand. The peak birth year for millennials was 1990; it’s a group that is turning 28 this year and thus entering prime years for homebuying. As it happens, 28 is exactly the median response in a Bankrate survey that asked adults for the ideal age to buy a home.
But that doesn’t matter if prices are out of reach relative