There has been a lot of excitement lately about the increase in housing starts and multi-family construction. China may allow more of it’s private investment capital to flow overseas towards the U.S. real estate market. The U.S. congress is offering incentives for non-U.S. citizens to purchase U.S. housing if the housing is in the $500,000 and up price range. And, builder stocks were up over the past two weeks after announcements that the major home builders were taking out more building permits for new home construction, even as commercial builders began taking out more permits for construction of new apartment buildings. The real estate brokerage community is aglow with excitement over the prospect that the housing market may finally be showing signs of life.
I hope that all of this does turn out to be good news. As a real estate investor and licensed agent, I’ve suffered my share of the housing market downturn. There is nothing I’d like to see more than a vibrant housing market. But, there is one big question that remains with regard to whether the U.S. housing market is actually on the mend.
Where are all the qualified buyers for all of this housing?
One of the primary reasons for the original collapse of housing over 2007 and 2008 was a classic case of supply exceeding demand. There was a ton of activity in new construction in everything from SFR’s to condos to resort / retirement communities, But there were too few real buyers who were buying those properties to actually use them to live in.
In the early 2000’s, end user buyers comprised about 70% of all home sales, and real estate investors made up the other 30%. Over the past couple of years, investors have accounted for about 40% of all home sales, buying up foreclosures to use as rental property, or to fix and resell to an end user buyer. That investor activity has not waned. Investors are still highly active in all forms of housing, boosting the housing sales numbers, but they are not end users. I still do not see a significant increase in true, end user buyers out there, creating the necessary demand that would naturally lead to a vibrant housing recovery.
Just the week before Christmas of 2011, there was a major story about errors in the housing sales data that is published by the National Association of Realtors. Core Logic discovered that actual home sales were much lower than originally stated, because of several errors, including the way that housing sales are tabulated.
The method used by the NAR actually meant that many individual home sales were counted twice, or even three times in some cases. Those housing sales numbers are set to be revised downward and will indicate that housing sales have been much lower than the data indicated. This probably does translate into an increase in the total months of supply already available, but I expect that this item will be downplayed by the NAR.
Home sales data makes no distinction for end-user buyers versus investors. It only counts housing sales. It does not tell you how many of those homes that were sold will end up being back on the market for resale or rental, so housing sales numbers have been misleading on a number of levels.
And while the official unemployment rate has been dropping, that is more because millions of unemployed have exhausted their benefits, and are no longer counted as unemployed. Even if we can reach some optimistic employment targets, the economy would add about 3 million jobs over the next 5 or so years, while foreclosure activity could reach a total of 10 million homes from 2008 to 2015.
Tight credit continues, with the resulting difficulty in qualifying for a mortgage. I went for a check up recently and my doctor informed me that she too has been unable to qualify for a home mortgage.
Rental property has it’s issues too. If you missed my recent article on the potential for a bubble in the rental market, you can find it here.
So, while I’d love to see a big rebound in housing, increasing the supply of homes with no real increase in true end-user demand could spell continuing problems instead. The only real way to restore the housing sector and stabilize it is to increase employment by creating jobs that pay at least 50K per year or more, because only a large increase in end-user buyers who have the income to afford a home mortgage can produce a true turn-around in the housing market.
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