The reason housing values are so important to many Americans is because their home is often the largest asset most people will ever own, this makes it the vessel where they store the bulk of their wealth. When looking at the chart below we see new construction continues far below the level prior to 2008 despite all efforts of our government to light a fire under housing values thus elevating the so-called wealth effect. While many people claim the formation of new households and pent-up demand drives home construction I beg to differ. I contend that over the last several years in many parts of America it has been a combination of too much money looking for a place to hide and buyers looking for a safe place to put their money. If I'm correct it has again put housing prices on a weak footing, this will become evident when mortgage rates begin to rise.
|Home Ownership Continues To Decline|
|Chart Shows Single Family Starts Remain Weak|
The apartment complex that I own in the Midwest is currently experiencing the largest number of vacancies we have ever had. Potential tenants are returning applications that indicate it is better to leave a unit empty than dealing with eviction in just a few months. Many houses in the area are empty or under leased. In 2005 and 2006 prior to the housing collapse, many people were looking at second homes, today not only have they shed the extra home many have doubled up with family or friends reducing the need for housing. This has left me busy trying to sort out and make sense of the current economy. This is no easy task, it seems we are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. Currently, we have a shortage of "qualified" buyers and renters.
A person financially qualified to lease an apartment need only apply at one complex while those who are rejected go from complex to complex creating the illusion the market is stronger than it really is. Government subsidized housing through programs such as section 8 have cannibalized the market often taking the "best of the worse" and leaving those landlords who choose not to participate with a rather unsavory lot that often includes those thrown off the program, near bankrupt, and/or chronically unemployed. This market continues to be driven by the FHA issuing and guaranteeing risky mortgages written by thinly capitalized non-banks. In 2012 the large Wall Street banks represented over 65% of FHA-backed loans, today that number is under 30%. Even they have realized loaning money to people that won't pay it back is a recipe for disaster.
Our current policies create a questionable base for higher home prices when we consider the low end of the market is driven by Fannie, Freddie, and the FHA all insuring 3.5% down payments from borrowers that often have a weak credit history. This begs people who are currently renting to rush into buying homes they cannot afford. It is important to remember that low-interest rates do not necessarily bring about quality growth or prosperity, decades of slow growth in Japan has proven this. America is preparing for a replay of the 2008 housing crisis. Our politically motivated government has insured subprime mortgages with down payments of as little as 3.5% while using weak underwriting standards. We are even seeing restrictions raised on borrowers with past foreclosures in a housing market that may drop 20% when this Fed Wall Street bubble pops. One of the sad realities of the current Fed policy is that by creating false demand today we are not creating more sales over the long-term we are simply moving them forward.
Years ago Lee Iacocca who brought Chrysler back from the brink and made the company viable said something to the effect of when you special out all your cars on Monday you have no sales for the rest of the week. This brings me to my next point, when it comes to real estate, low-interest rates at some point becomes a double edge sword, that affects both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. Often we reach or exceed demand, this eventually has a dampening effect on rents and people stop buying it as an "investment". Rents from real estate and the prices it brings when sold must appreciate more than the natural depreciation from the wear and tear from age or the main driver for owning it vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity.
How does the reality of a half empty apartment complex and a slew of empty houses gel with what we hear about soaring rents, the demand for more housing, and more affordable housing? If you call this a recovery at least admit housing prices vary greatly across the nation. Only politicians in Washington would be silly enough to think that landlords who have to compete against subsidized housing would be eager to remain in the game or that someone working for a living enjoys paying more for an older apartment than someone on the dole who moves into a brand new unit for a fraction of the cost. By not rewarding those who do the right thing our current policies have a corrosive effect on both housing and society.
The fact is prices vary drastically throughout America and weak pricing in many markets should be viewed as proof that what many see as a "boom" is far from spectacular. To further confuse and complicate matters a Bloomberg article titled "Wall Street Unlocks Profits From Distress With Rental Revolution" looked behind the curtain and revealed that a great deal of this housing recovery that has driven the average home price upward since 2012 has been the result of Wall Street hedge funds buying in bulk foreclosed houses in order to turn them into rentals. Like many people I find it totally objectionable these deals were "bundled" and offered in such a way that allowed big business to crowd the average American out of the housing market. In parts of the country cash fleeing China and Russia has also flowed into housing and lifted the market higher.
Instead of creating policies to rebuild our cities and housing Washington has doled out low-interest money to Wall Street and home builders in an effort to kick-start the economy this has generated the illusion of growth and rising prices oblivious to the new problems these policies create. When people enticed by current artificially low-interest rates leave older neighborhoods and move to a new house in the suburbs they in effect hollow out our cities. America has built a lot of housing units over the years, now we must face the fact that they need to be maintained. The policy of putting people in older houses that they have no interest or knowledge in how to maintain causes those living around them to flee the area and brings about further decay. When offered the choice many people find moving easier than repairing and maintaining their homes or neighborhoods and low-interest rates power this trend forward.
Housing policies should be geared toward creating jobs that maintain and encourage the upgrading of existing units rather than making them prematurely obsolete. This is a flashing red light warning of danger ahead. By choosing the easy answers America has not faced its housing problems with long term solutions and encouraging this bodes poorly for the future. One of my readers commented on a prior article about housing by writing; The artificial housing market has always been driven by malinvestment. The mistaken investment in wrong lines of production inevitably leads to wasted capital and economic losses and subsequently requires the reallocation of resources to more productive uses. Artificiality low-interest rates created by the Fed and Government backstopping housing purchases distort price signals and lead to malinvestment.
The bottom-line is we continue to have a shortage of "qualified" buyers and renters and it seems that government policies are pushing on a string and calling it demand. The low end of this market is driven by Fannie, Freddie, and the FHA all insuring 3.5% down payments from borrowers that lack substantial collateral. We have a situation where when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. History shows homes that are paid for and unleveraged can be a better than average place to store wealth when purchased for a good price, as to whether now is a good time to buy that is difficult to say. Currently, we are in uncharted waters and where this market is headed is anyone's guess, but one thing is certain it is not straight up. Decades ago I remember reading how in some countries because of inflation and high-interest rates little financing was available, thus the only houses being built were those financed by cash, this may someday be the situation here in America,
Footnote; A while back I wrote a piece delving into some very real numbers concerning housing. The link to that article can be seen below. It may surprise those who see housing as a strong market. Also is a link to an article about what drives the kind or type of housing we are seeing built today.