Housing May Become Even Less Affordable

Orion’s brokers have seen our housing market rally, and recent articles and research indicate that the U.S. housing sector has mostly recovered from the credit crisis from ten years ago. The homeownership rate has started rising again, to 64.2 percent from 62.9 percent in mid-2016, and the gap between rental and mortgage costs has moved in favor of single-family owners. Also, first-time home buyers totaled 2.1 million last year, almost back to the housing boom peak.

Still, Orion’s broker’s clients see a lack of affordable inventory. The National Association of Realtors just said the inventory of available properties for sale tumbled 6.1 percent last month to the lowest ever for a May in the history of its data. Why aren’t market forces filling this need?

Many of our brokers saw the subprime mortgage bubble burst and single-family house prices plummeted 34 percent, and homeownership collapse from its 69.2 percent peak in the fourth quarter of 2004 as many foreclosed homeowners were busted back to being renters. We also saw developers and builders concentrated on rental apartments, flooding the market.

Much of the single-family building in the Southwest and in recent years focused on larger houses that appealed to upscale buyers who still had the necessary down payment money and mortgage borrowing capability. At the same time, investors, both individuals and increasingly institutions, bought legions of foreclosed single-family houses and turned them into rentals. Some builders constructed such dwellings to be used directly for rentals. As a share of total housing units, the portion geared to investors jumped from 30 percent before the housing boom to 34 percent today, an increase of eight million rental units.

Lower turnover also results from postwar babies staying in their owned houses as they postpone retirement. Moderate-cost house construction is also restrained by rising building costs. Many of those Central American carpenters, masons and plumbers who facilitated the housing boom have gone home, and tighter border controls are keeping out those who would like to work in the U.S. Construction industry wages have leaped.

Materials costs are also jumping. Framing lumber in May cost 39 percent more than a year earlier due to the 20 percent tariff the Trump administration placed on Canadian lumber imports last year as well as forest fires and insect damages. Steel prices are up as well, with the new tariffs on imports. Homebuilding is further curtailed by stringent environmental and zoning regulations.

On the demand side, increases in home prices in areas Orion lends have outpriced income and asset gains of younger potential homebuyers. Many individuals lack down payment money as student debts soars. The Federal Reserve Bank of New York calculates that increases in college costs and student debt from 2001 to 2009 explains 11 percent to 35 percent of the 7.7 percentage-point drop in the homeownership rate of those in the 28 to 30 age-bracket. Those under 35 have median savings of only $1,500, and it’s just $5,000 for the 35-to-44 age group.

Housing activity is likely to recover further, but many of the supply and demand deterrents are unlikely to dissipate soon. Be sure to check with your Orion AE for first time home buyer programs to be ready to jump on that dream house when it comes available for your client.

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