U.S. housing hangover finally wearing off
By Robert Cyran and Agnes T. Crane
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Six years into the U.S. housing downturn, the worst finally seems to be over. The overhang of inventory is no longer so daunting as population growth and reduced construction continue to cut the glut of unsold homes. Throw in rising employment and improved affordability, and young Americans cooped up with too many roommates or, worse, their parents may finally get a chance to strike out on their own.
What may be the beginning of the end of the housing crisis has already boosted homebuilders like Toll Brothers, Lennar and DR Horton, whose stocks have climbed more than 30 percent over the last six months. The 2.3 million existing homes currently on the market would take just six months to offload, the smallest backlog since April 2006, according to the National Association of Realtors. In July 2010, the supply overhang reached more than 12 months.
Meanwhile, new construction has been depressed for years. Since 2009, builders have been throwing up less than 500,000 single-family homes a year, down about 60 percent from the rate of construction seen, on average, between 1983 and 2008, according to U.S. census data. At some point, construction is likely to return to more normal levels that keep pace with population growth. But in the meantime, the low level of residential building is eating into inventories.
Lurking in the background, however, is the so-called shadow inventory – homes that will eventually be put up for sale due to foreclosure. In February, the U.S. government estimated that there were 3.6 million vacant homes being held off the market. This matters for housing prices since homes that land on the doorsteps of Fannie Mae, Freddie Mac, Wells Fargo or other banks due to foreclosure are often priced at a deep discount. More of this inventory may soon move out of the shadow as banks, which recently agreed to a $25 billion foreclosure settlement, work through their backlogs. In January, newly initiated foreclosures jumped 28 percent, according to Lender Processing Services.
Even so, there are several reasons why remaining inventory may dissipate quickly. First, homes have become much more affordable. During the boom, the ratio of the median existing home price to income hit around 4.25 times, according to CreditSights. The sharp decline in home prices has knocked the ratio back below 3.5 times. That’s still slightly above a more normal ratio of around 3 times, but an improving labor market should increase wages, making housing more affordable still.
Second, there’s a large group of potential buyers sitting on the sidelines. Having a steady income is a key factor in being able to rent an apartment or get a mortgage. With unemployment rising from 4.4 percent in 2007 to 10 percent in 2009, that security was lacking. The situation was particularly bad for those aged 24 to 35, the cohort that produces an outsized number of first-time buyers.
Kids moved back in with their parents, and adults took on roommates. The percentage of American men aged 25 to 34 who are living at home has increased from 14.2 percent in 2007 to a record 18.6 percent, according to the U.S. Census Bureau. And the government estimates the number of households with extra adult members has increased by 2.1 million since the start of the last recession. But unemployment is now dropping, reaching 8.3 percent in January. That could nudge people back into the market for housing.
Finally, once residential housing does turn up, the recovery could feed upon itself. Employment in the hard-hit construction sector, for instance, is now rising, creating its own subset of potential homebuyers.
Some of the effects of the glut won’t be easily overcome, however. Huge price falls in Nevada, Florida and elsewhere mean many people will find it difficult to move because their homes are worth less than they owe on their mortgages. Some first-time buyers may remain cautious, especially given lenders are now demanding bigger equity checks.
After experiencing the recent downturn, former would-be buyers might choose to stick with renting. In fact, permit data suggest builders are concentrating their energies on apartment buildings rather than single-family houses. That trend could boost construction firms more than home prices in the near term. But perhaps it’s the kind of relatively prudent approach that will bring the housing market a more sustainable long-term recovery.