Chart Of The Day: Existing Home Sales
Existing home sales for April came in at 4.97 million from an upwardly revised March reading of 4.94 million (originally 4.92 million.) However, the question remains that with rising home prices, and tightening supply, when do potential buyers get priced out of home ownership? Today's chart of the day is actually two charts that may start to give us a clue as to the state of the housing market currently.
The first chart shows existing home sales as compared to the average year-over-year change in wages. As home prices rise, regardless of the current interest rate, the monthly mortgage payment increases. It is important to remember that families buy "payments" rather than "houses" so with wage growth stagnant, or decline, the ability to buy a home becomes much more of an issue.
The second chart shows that this may be happening currently. The chart below is the annual percentage change in real estate loans at all commercial banks.
There are two important points to take notice of. First, the rate of loans for real estate has turned down in recent months which is coinciding with the decline in mortgage applications and a stagnation in existing home sales. Secondly, loan growth, as shown in the chart inlay, has been virtually flat since the middle of 2011 which does not really support the whole housing recovery meme.
I have made these points in the past and Doug Kass' recent post reiterates my ongoing concerns:
"Hedge funds and other corporate and institutional investors have gobbled up homes for investment, creating the appearance of a more vibrant residential market than might actually exist. This has served to prop up home prices, which, in turn, could serve to turn away first-time homebuyers (who continue to be haunted by little wage improvement and a still relatively sluggish labor market). I have argued that construction only represents about 3% of U.S. GDP, and, as such, I didn't think (and still don't think that) the housing market could provide enough leverage to get U.S. real GDP growth to exceed a tepid 2% rate. I continue to expect a pause in an anticipated durable multiyear recovery in housing."
However, this becomes even more of an issue if the "bond bubble" breaks and interest rates do rise. For potential homeowners the cost of "buying" will increase significantly and the profit margins for investors will decrease. Just recently as mortgage rates ticked up only slightly there was an almost immediate falloff in mortgage applications.
Currently, there are still more than 25% of homeowners underwater which limits their ability to move, refinance or sell their homes. However, as prices rise, there are two issues that begin to attack the housing story: 1) As prices reach levels where underwater homeowners can sell they will likely do so out of a psychology need to escape the "trap," which will bring a large supply of homes back onto the market, and; 2) rising prices will eventually erode the profitability of buying homes for rentals which will bring the speculative frenzy that has been the driver of the recent recovery to a halt.
The housing recovery is ultimately a story of the "real" unemployment situation which still shows that roughly a quarter of the home buying cohort are unemployed and living at home with their parents. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations. Also, we should not discount the psychology of home ownership has dramatically changed since the crash as many of the "millennials" saw the financial damage their parents suffered and are opting out of taking such a perceived risk.
As I stated recently the optimism over the housing recovery has gotten well ahead of the underlying fundamentals. The overarching problem is that the housing market that is almost exclusively dependent on the continued push to artificially suppress interest rates combined with massive amounts of direct stimulus, and incentives, to bailout current homeowners and banks. This intervention is causing an artificial supply suppression which is likely to create a backlash in the future as the current supply/demand conditions are unsustainable.
While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Today, these repeated intrusions are having a diminished rate of return and the risk now is that interest rates rise shutting potential homebuyers out of the market. It is likely that in 2013 housing will begin to stabilize at historically low levels and the economic contribution will remain fairly weak.
The downside risk to that view is the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts, elevated defaults of underwater homeowners and a slowdown of speculative investment due to reduced profit margins. This story will continue to unfold in the months ahead and the keys to watch for will be the level of interest rates, real employment and wages, and the effects of any fiscal drags from policy changes relating to reductions in spending and potentially additional taxes.