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Stagnant wages and job insecurity for Millennials drags homeownership rate to 19-year low

Stevie-Lynn Pickel and her fiancé, Adonis Smith, put money into a joint savings account whenever they can. The couple has a two-year plan: save up $35,000 for a down payment on a three-bedroom house, move out of the condominium they’re renting in Waterbury, Connecticut and then get married.

“We want our down payment to be 20-to-30 percent of the asking price, so our interest rates will be lower,” Pickel, 26, said. “That, and we don’t want to be paying a mortgage for 100 years.”

Since the housing bubble burst in 2006, Millennials are buying fewer and fewer homes.
Since the housing bubble burst in 2006, Millennials are buying fewer and fewer homes.

Homeownership rates hit a 20-year low at the end of 2014 in large part because young people like Pickel and Smith, 32, can not afford to buy a house. To help first-time homebuyers get into the market, Fannie Mae and Freddie Mac recently lowered their down payment requirements from five to three percent. But even with a lower down payment requirement, Fannie and Freddie’s new mortgage option is still more expensive than other home loans. Add to that an economy rife with stubbornly low wages and a lack of job security, especially among Millennials, and homeownership rates may drop even further in 2015.

The homeownership rate – the percentage of homes occupied by the people who own them – fell to 64 homes per 100 at the end of 2014, the lowest rate since 1994 when it was also 64.

The homeownership rate began tumbling when the housing bubble burst in 2006 and foreclosures swept across the U.S. In an attempt to right the ship, the government increased regulation and tightened lending requirements – a policy change spearheaded by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010. Government intervention achieved its goal and created a chilling effect on the lending practices of banks.

“Dodd-Frank has heavily penalized banks for making risky investments and, as a consequence, the banks have moved away from the mortgage market,” said Mike Englund, chief economist at Action Economics. “So we don’t have a willingness to extent mortgage credit.”

But the increased regulation has not dampened demand for homeownership.

A recent survey found that 59.7 percent of people who rent said that buying a house is the best long-term investment an individual can make – up from 56.9 percent the year before, according to the Zillow Mortgage Access Index.

And young people accounted for most of the increase in the Zillow survey: 66.2 percent of renters between the ages of 18 and 34 said that owning a home was the best long-term investment they could make.


“Renting is pointless,” said Pickel, the 26-year-old potential homebuyer. “My rent is $800 a month – that’s basically a mortgage payment. Plus, most landlords don’t take responsibility for their condos.”

To expand credit availability to would-be homebuyers, Fannie and Freddie announced the new 97 percent loan-to-value ratio mortgage option, which lowered minimum down payments to three percent for first-time homebuyers in December 2014.

“When you have a lowered down payment, you certainly take on more risk,” said John Councilman, president of Association of Mortgage Professionals. “Fannie and Freddie have gauged it and they must assume that the risk is not significant enough to make it a problem for them. We’re hoping that they’re correct.”

To mitigate their risk, Fannie and Freddie require that borrowers who use the 97 percent option buy mortgage insurance and another form of risk sharing like a loan level pricing adjustment – a fee based off of the borrower’s credit score and the type of house purchased.

Fannie and Freddie also increased mortgage rates for the 97 percent option and made the security a non-negotiable 30-year fixed-rate mortgage.

That’s why Pickel, the woman who lives in Waterbury, is foregoing the three-percent down payment option — she says that, in the long run, the 97 percent option would be more expensive.

“The banks like it better when you pay them a lot of money all at once,” Pickel said. “That’s why we’re saving up until we get to $35,000.”

For young, would-be first-time homebuyers like Pickel, the down payment is often the biggest hurdle to overcome, according to the National Association of Realtors. Of all the people 33-years-old-and-under surveyed by NAR, 20 percent responded that saving up for a down payment was difficult compared to 2 percent of people 59-to-67.

People 44-years-old-and-under are either unable or unwilling to buy houses since the housing and financial markets collapsed in the mid-2000s.
People 44-years-old-and-under are either unable or unwilling to buy houses since the housing and financial markets collapsed in the mid-2000s.

The 97 percent option should get people into homes, but it remains to be seen if the people who use the option will be able to afford their mortgage payments and stay in their new homes, said Councilman, the president of the Association of Mortgage Professionals.

“If a homebuyer pays the minimum down payment, it is most likely because it is all that he could come up with,” said Councilman. “So that is the concern: that the individual is unable to afford his lifestyle and save even in their current circumstance, which is presumably going to be equally as expensive or possibly less expensive than what they’re going into.”

Because they earn less money and haven’t worked for as many years, it’s toughest for young people to afford mortgage payments.

The median weekly earnings for people between 25-and-34 years old is $743, compared to $922 for 55-to-64 year olds, according to the Bureau of Labor Statistics. Additionally, the median tenure of workers ages 25-to-34 is 3 years – for 55-to-64 year olds, it’s 10.4 years.

“Young people today suffer from one thing that hasn’t been so much of a problem in the past and that is job stability,” said Councilman. “People are afraid to purchase a home and make a long-term commitment because they’re still not assured of their income and their income continuance.”

And as long as wages remain stagnant and home values continue to appreciate slowly, homeownership rates will improve only minimally, said Councilman.

“I don’t expect a huge jump in homeownership rates – not every Millennial is going to suddenly go out and start buying houses soon,” Councilman said. “But I believe, slowly, over the next few years, we will see a greater participation rate among Millennials as they increase in their job stability and income.”

Housing starts down again in January

Housing starts fell in January after a strong December.
Housing starts fell in January after a strong December.

U.S. homebuilders started construction on fewer projects in January than in December, continuing a six-year, saw-tooth pattern of ups and downs in housing starts.

January housing starts were at a seasonally adjusted annualized rate of 1.065 million units, 2 percent below the downwardly revised December estimate of 1.087 million. Economists surveyed by Bloomberg predicted that housing starts would slow down in January and posted a median forecast of 1.070 million units per year.

Inclement weather contributed to the drop in housing starts in the U.S. in January — especially in the Northeast and Midwest regions, which saw a 3.5 percent and 22.2 percent drop in housing starts respectively because of heavy snowfall and frigid temperatures. Although housing starts is a seasonally adjusted indicator, winter is historically the worst time of year for starting construction on new homes because cold weather dissuades potential buyers from leaving home to meet with builders and heavy snowfall prevents builders from breaking ground on new projects.

Compared to December, homebuilders met with fewer prospective homebuyers in January and felt slightly less confident about their sales prospects for the year, according to the National Association for Home Builders/Wells Fargo Housing Market Index. According to builders surveyed by the NAHB, buyer traffic, a measurement of consumer interest, fell five points to 39 in January and overall confidence for the 2015 housing market fell two points to 55. A rating of 50 or above is generally considered good and builders surveyed said that harsh weather conditions were the primary reason the drop in NAHB ratings.

“Consumer cash flow and balance sheets have definitely improved, but we’ve had a lot of cold weather,” said Stan Shipley, senior managing director at Evercore ISI. “There’s no reason consumers have to rush out right now and buy a home because mortgage rates are relatively low, so they’re not being priced out of buying a home yet.”

Shipley said that the housing market is still at least two years away from reaching an annualized rate of 1.5 million housing starts – a number that would meet demographic and regional demand for the construction of new homes in the U.S.

“We’re in the middle of the recovery,” Shipley said. “We’re not in the 8th or 9th inning of this expansion – we’re in the fourth, maybe fifth.”

After the housing bubble burst in 2008 and housing starts bottomed out in April 2009, the housing market has recovered in fits and starts. But the underlying trend during that time shows that housing starts are on a gradual, if uneven, upward trajectory – since January of last year, housing starts have increased 18.7 percent.

Ryan Sweet, senior economist at Moody’s Analytics, says the housing market, like the rest of the economy, is poised to begin accelerating rapidly. Sweet said that by springtime, the housing market will start to pick up steam and he forecasts a 40 percent increase in housing starts to 1.65 million by year’s end.

Sweet said that as job creation continues to surge, companies will compete for employees, which will remove slack from the economy and cause wages to increase dramatically by mid-year. At that point, the Federal Reserve will increase interest rates, which will cause prospective homebuyers on the fence about buying a new home to get into the action and use their accumulated wealth to break ground.

“And when they jump in,” Sweet said, “homebuilders will respond by building more single-family homes. When the housing market turns, it will likely turn quickly.”

March Housing Starts Will Rise With the Mercury

It’ll be a spring thaw: Housing starts likely jumped as soon as the weather warmed up in March, even as concerns remain about the cost of land and labor.

Starts will rise to a seasonally adjusted annualized pace of 970,000 when the Census releases its home-construction report tomorrow morning, according to analysts polled by Bloomberg. That’s up from the January and February paces, both of which fell just below a 910,000 pace.

Analysts and builders alike blamed the slowdown on especially harsh winter across the country.

Yet Brian McKee, who is president of Midwest Homes in Madison, Wis., said building has bounced back along with the temperature.

“In January and February, we had a lot of dates where we just weren’t able to work because of the cold,” McKee said. “We pushed off starts on some projects, but everything is ramped up now.”

Some analysts did lower their predictions after the National Association of Home Builders and Wells Fargo released a disappointing Housing Market Index on Tuesday. It showed that builder sentiment had stayed essentially flat, rising only to 47 from a downwardly revised March figure of 46.

Scores below 50 on the HMI are considered more negative than positive.

NAHB Chief Economist David Crowe said job growth and historically low mortgage rates were good for the sector but that it faces big costs.

“Headwinds that are holding up a more robust recovery include ongoing tight credit conditions for homebuyers and the fact that builders in many markets are facing a limited availability of lots and labor,” Crowe said.

Still, the report revealed that builders were far more bullish for the medium term, as HMI for sales over the next six months increased four points, to 57.

Ameriprise Financial Senior Economist Russell Price, who predicted 970,000 starts, said builders just wanted to see actual sales before they reported better sentiment.

He added that demographics suggested U.S. housing would return to high levels in the second quarter, saying that robust permitting in recent months—and the estimated 1,010,000 permits that would appear in tomorrow’s report—showed that builders would be accelerating activity.

“To put it quite frankly, we’re running out of room to put people,” Price said.

Housing Recovery Masks Dangers for Young

Galen Eckenroth has what he knows is an uncommon pastime for someone his age: He’s looking to invest in real estate.

Yet no matter how much he looked last year, the 26-year-old from San Diego just wasn’t able to buy. He says that in a city where buyers were willing to meet ever-higher prices, sellers turned up their noses at his Federal Housing Administration loan.

“People were coming in with cash,” says Eckenroth, who works as director of operations for a company that sells paddleboards. “It was like, ‘I don’t know how to compete with that.’”

In fact, first-time buyers all over the country, many of them young people facing a tough job market, are finding themselves in Eckenroth’s shoes. They’re locked out of housing as prices climb beyond what their generation could normally afford. And the implications for their long-term financial security could be dire.

The problem is that, even though affordability is high and construction is up, most of the action is in the high end of the market, which young people typically can’t afford.

When the sector picked up last year, builders started concentrating on buyers, some of them institutional, who could meet new high lending standards, even as the labor force fled to other jobs or areas. Sellers held on, waiting for prices to rebound, which tightened inventory and drove prices up even more.

The result is that, while home affordability has stayed relatively high, affordability for first time buyers is reliably low. For instance, in the fourth quarter of 2013, headline affordability was 168.5, but for first-time buyers it was only 111.2, according to the National Association of Realtors. (A higher score means homes are more affordable.)

Young people, meanwhile, have lousy job prospects, high student debt and difficulty qualifying for a mortgage. They’re not buying, but more importantly, they often can’t — and that could hurt them into the future.

“People under 40 are falling so far behind that it may become impossible to catch up,” says Signe-Mary McKernan, a senior fellow at the Urban Institute, which conducts research on economic and social issues in the U.S. She says the gap in homeownership is a big part of why.

Indeed, by the fourth quarter of last year, homeownership for those under 35 had dipped to 36.8 percent, down from 42.7 for the same period 10 years ago, according to the Census. That means millions of young people who suddenly don’t have the major investment that appreciated throughout most of the lives of their parents, providing them with a reservoir of wealth and security.

McKernan puts the losses for someone who delays homeownership for 10 years at $42,000.

“Wealth isn’t just money in the bank,” McKernan says. “It’s insurance against tough times, tuition to get a better education. It’s capital to build a small business. It’s a springboard into the middle class. Wealth translates into future opportunity for you and for future generations.”

Yet it’s an opportunity that many young people pass up.

That’s why, last week, Eric Stewart arrived to a seminar he was hosting for first-time homebuyers in the Washington, D.C., area to find that just four people had showed up.

The market is booming in the capital too, and sellers know they can get more than young people are able to put down.

“Unless the first-time buyer comes in with a bazooka, they’re just not going to get the house,” says Stewart, an agent for Long & Foster Real Estate.

To fix this, we could loosen mortgage restrictions again, but that’s likely a political non-starter. Memories of the bubble are fresh on both sides of the aisle. It may come down to job and income growth.

While we’re waiting, though, the slowdown could easily spread beyond young people: Older homeowners might find themselves stuck in homes and unable to access their equity without buyers below them looking to move up. That, in turn, could put the brakes on the home building that powers so much of the American economy. To make matters worse, a generation that’s just now in diapers will have to leverage their educations without being able to expect a windfall when they inherit.

Chris Estes, president and CEO of the National Housing Conference, which advocates for affordable housing, says the U.S. is better off when up to two-thirds of its people can participate in the wealth creation of owning a home.

“I do think the current market is a real warning signs for us,” Estes says. “When the movement at the market is at the upper end, we should be worried. That’s not a sustainable path.”

February Cold Keep Housing Starts Flat

Februarys weather kept U.S. housing starts low, at a seasonally adjusted, annualized rate of 907,000, down 2,000 from January. Heavy permit applications, however, suggested the numbers would increase again once the weather warmed.

Weather held U.S. housing starts flat in February, even as the sector showed signs it would grow in spring.

Starts dropped to a seasonally adjusted, annualized pace of 907,000 in February, a mere 0.2 percent below January’s revised estimate of 909,000, according to data released jointly on March 18 by the Census Bureau and Commerce Department.

Analysts polled by Bloomberg had predicted 910,000.

Yet harsh winter weather in the Northeast appeared to have caused the slips, with starts in the region plummeting 37.5 percent during a month of prolonged cold.

Ice and snow make it physically difficult to do the digging for foundations that defines a start.

“The slowdown that was seen in the last few months was probably weather-related,” said Ksenia Bushmeneva, an economist at TD Economics. “It’s hard to argue against that.”

Even Sun Belt-based building giant KB Homes, which reported a first-quarter profit for the first time since 2007, told investors that the winter had affected its business in Washington, D.C., Colorado and North Carolina.

Other builders outside Washington, D.C., had to forgo starts or pay more for them, said Fisher Custom Homes principal Rob Fisher.

“I’ve seen some guys forcing it at great financial expense,” said Fisher, whose company is in Vienna, Va. “Concrete got poured when it shouldn’t have.”

With unusually tough winter weather preventing starts, some economists said the report underplayed strength in the housing sector.

In the winter, seasonal adjustment factors convert usually low tallies of starts to the adjusted data of the reports. Those adjustments, though, presume an easier winter that depresses starts less and produces raw data that need smaller increases to strip out weather effects.

For the hard winter the U.S. has endured, though, some economists said the adjustment factors simply don’t inflate the numbers enough.

“If they could have adjusted appropriately, it would have looked even better,” said David W. Berson, chief economist at Nationwide Insurance.

In addition, January’s data were revised up by nearly 30,000 starts, suggesting the troubling numbers in last month’s part had been overblown. February’s data, which already beat the average for the first three quarters, could also see upward revisions, since cold weather tends to slow reporting from builders.

Despite cold weather holding down U.S. housing starts in the first two months of 2014, both months exceeded the average for the first three quarters of 2013.

The report did have some anxiety-producing data.

Permits for single-family homes fell almost 2 percent. And the 28 percent rise in permits for structures with five or more units may signal that developers are betting Americans will only have enough money to rent their homes for the foreseeable future.

Structures with five or more units include condominiums, which occupants own, but in most cases residents are renting in the building.

Bushmeneva, of TD Economics, said sustained growth into 2015 would require improvements in the unemployment rate in wages.

Analysts, though, said that the 7.7 percent rise in overall permits, to 1.02 million, showed builders are planning to move quickly once the weather eases.

“We could see a real strong surge in the spring,” said Celia Chen, the housing economist at Moody’s.

Chen predicted 1.4 million starts in 2014, which would put the sector nearly on track to house a growing population and would result in significant hiring and materials purchases.

Other analysts called for starts in the 1 to 1.2 million range.

Home prices dropped slightly in December

U.S National Home Prices Index


The housing market’s recovery slowed at the end of 2013 as U.S. home prices nationwide dropped slightly.

The National Home Price Index declined 0.3 percent in the fourth quarter, according to S&P/Case-Shiller Home Price Indices, released by S&P Dow Jones Indices Feb. 25.

The 10-City and 20-City Composites increased 13.6 percent and 13.4 percent respectively in 2013, according to S&P/Case-Shiller. All 20 cities showed  year-over-year increase.

Average home prices across the country in the fourth quarter rose 11.3 percent over the fourth year of 2012, showing they are back to their mid-2004 levels.

“The market is leveling off,” said Peter Morici, professor of business at the University of Maryland. “The housing market will contribute to the continuing economic recovery, which will run maybe 2.5 percent a year,” he added. “But it’s not going to power forward some kind of profound growth.”

Declining foreclosures, foreign investors and slowly rising prices since the 2008 recession drove up housing prices in 2013. Foreclosure filings–default notices, scheduled auctions and bank repossessions — declined 26 percent from 2012, according to RealtyTrac, a foreclosure index. Foreign investors, who usually pay cash, say the market is profitable.

Despite gains in recent years, the 10-City and 20-City home prices are still 20 percent below their 2006 peak.

Housing sales dropped 5.1 percent to a seasonally adjusted annual rate of 4.62 million in January, from 4.87 million in December, according to the report released Feb.21 by the National Association of Realtors. Michael Wolf, an economist at Wells Fargo Securities Economics Group, said increasing mortgage rates have slowed demand.

“It raises their low cost, and people get pushed out of the market or can no longer afford the house,” Wolf said, indicating that people at the lower end are much more vulnerable to floating mortgage rates.

The 30-year fixed mortgage rate hit 4.0 percent in June after floating in the range of 3.0 to 3.9 percent for more than a year, according to Zillow Mortgage Marketplace.

While higher mortgage rates are not a good sign for median-income buyers in the United States, they attract more investors from other countries. Michael Bellings, a real estate agent at Vanguard Properties in San Francisco, said the housing market there was less depressed than a year ago.

Though housing prices nationwide dropped slightly in December, prices in San Francisco showed growth. San Francisco is also among 20 cities that showed  year-over-year increases, according to S&P/Case-Shiller, with growth of more than 20 percent.

Bellings noted double-digit increases in prices and values in San Francisco. Working now for a foreign potential buyer, he said international investors buy 25 to 35 percent of local homes.

“They tend not to value what the house looks like or even how big is it,” Bellings said. “They simply care about the numbers and return on investment.”

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Declining home prices offset rise in sales

Existing home sales increased last month, but declining prices and a high percentage of distressed sales indicate that the housing market faces a long road to recovery.

The National Association of Realtors reported Feb. 23 that existing home sales increased 2.7 percent from December 2010 to a seasonally adjusted annual rate of 5.36 million. That number beat the 5.22 million projected by economists surveyed by Bloomberg News, as bargain hunters snapped up homes in spite of heavy snowfall across the country.

The median price for an existing home fell to $158,800, down 3.7 percent from 164,900 in January 2010, the report also noted. Fourth quarter home prices were down 4.1 percent from the year-ago period, according to the S&P/Case-Shiller National Index released on Feb. 22. That figure represented a drop to 2003 levels, and the worst year-to-year decline in the index since the third quarter of 2009.

Prices dropped even as consumer confidence reached a three-year high in February and unemployment fell to its lowest rate since April 2009.

“There’s not a lot of positive news in the housing sector,” said Scott J. Brown, chief economist at Raymond James & Associates. “We have a huge percent of distressed home sales, and the decline in prices will put more people underwater and lead to more distressed sales still.”

Distressed homes accounted for 37 percent of homes sales in January 2011, up from 36 percent market share in December 2010. The NAR began tracking distressed sales in October 2008. Distressed sales reached 49 percent in March 2009, but have mostly hovered around one-third market share.

The NAR report comes as the House Financial Services Committee considers a Republican-sponsored package of bills that would end the Obama administration’s foreclosure prevention initiatives.

Michael Englund, chief economist at Action Economics, said distressed sales would have to be flushed through the system for the housing market to recover.

“From the point of view of the business cycle, we want to get the foreclosures over with as soon as possible,” he said.

Sherry Cooper, executive vice-president at BMO Capital Markets, said that increased sales represented a liquid market and could be a silver lining in the context of broader economic recovery.

“A lot of jobs will need to be created before housing markets clear,” she said. “People want to move where the jobs are, but they may not move if they can’t sell their homes. So the improvement in liquidity is a very positive factor.”

Brown agreed that jobs would eventually drive a recovery in the housing market, but was less bullish on the importance of increased sales.

“A recovery in the housing sector will depend on job growth, which should arrive over time,” he said. “For the moment, things are pretty soft.”

Updated Mar. 2