In the game plan for the 2014 economy, housing was assigned a crucial role: catalyst in chief. Pent-up demand, low interest rates and attractive prices would strengthen the recovery in home-buying and construction. This would then bolster confidence. Young families would finally get their piece of the America Dream. Satellite industries — appliances, carpeting, furniture — would flourish. Construction workers would be re-employed. Housing got us into this mess; housing would help get us out.
Whether housing’s slump is just a weather-related blip or a new normal is unclear. But many indicators confirm the slowdown. Sales of existing homes in March, at an annual rate of 4.59 million units, were down slightly from February and were 7.5 percent lower than in March 2013. Sales of new single-family homes got hit harder, falling 14.5 percent from February and 13.3 from a year earlier. New building permits — a harbinger of future construction — dropped 2.4 percent from February, though they were up 11.2 percent from March 2013.
Along with weather, the explanation seems plain. “Buying a home isn’t as good a deal as it was a year ago,” says economist Patrick Newport of IHS Global Insight, a consultancy. Higher interest rates and higher prices have made homes less affordable. In early 2013, interest rates on 30-year fixed-rate mortgages averaged 3.4 percent, says Freddie Mac; now rates on similar loans are 4.3 percent. At the same time, home prices have bounced off recent lows. According to the widely used S&P/Case-Shiller index, they’re up about 13 percent for the year ending in February.
All this has eroded affordability. Consider the affordability index of the National Association of Realtors (NAR). It assumes that a family with the median income ($63,623 in 2013) makes a 20 percent down payment and has a mortgage with the average interest rate. It then calculates how much the family would have to spend monthly to buy the median-priced home. (The median means that half the prices are higher, half are lower.) From 2012 — the recent low point — until the end of 2013, the required monthly payment rose about one-fifth. Even so, homes remain highly affordable historically.
Stricter mortgage lending standards have weakened the housing recovery. But there’s also another cause: The housing market is, to some extent, frozen. “Buyers don’t want to buy, and sellers don’t want to sell,” says Mark Fleming, chief economist of CoreLogic, a housing data company.
Many potential sellers, he says, refinanced their mortgages at interest rates of 3 percent to 4 percent; if they sold and bought a new house, the new mortgage might be 4.5 percent or more. “There’s a disincentive to sell,” he says. That’s reinforced by many homeowners’ low equity. Although the share of homes “under water” — with mortgages exceeding equity — has dropped from a peak of about 25 percent in late 2009 to 13 percent now, the equity of many homeowners isn’t enough to cover the down payment on a new home, Fleming says. This, too, deters selling, he argues.
A scarcity of sellers in turn demoralizes buyers. Prices rise because few homes are on the market. This causes some potential buyers to drop out. As important, choices shrink, causing others to stop searching because they can’t find what they want. “We hear all the time from our members about the shortage of desirable homes in desirable locations,” says economist Danielle Hale of the NAR. All these problems may disproportionately afflict first-time buyers. Since late 2012, they have typically accounted for less than 30 percent of home purchases; earlier, they regularly exceeded 30 percent, according to NAR surveys.
A growing population makes housing’s long-term outlook bright, says economist Mark Zandi of Moody’s Analytics. He thinks warmer weather might soon prompt a revival. If not, the slowdown by itself won’t tip the economy into recession. But it won’t serve as a catalyst for a stronger recovery. Zandi figures that every single-family home that’s started creates 3.7 jobs for a year. By this math, 100,000 housing starts means a difference of 370,000 jobs. This economic recovery has long seemed star-crossed. Will a stunted housing rebound be the latest proof?
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