A good description of the new normal, without asking too many questions, like: Why did foreclosures dry up? Shouldn’t we accept 640 credit scores as a minimum standard? Wouldn’t there be more sales if sellers were more reasonable on price?
While he has written about some of the elements in the past, Mark Fleming neatly summed up the current state of housing’s supply and demand constraints in the latest edition of CoreLogic’s Market Pulse. That issue, the company’s chief economist said, is one of the factors underlying the current faltering housing recovery and contributing to what he calls the new housing normal.
First there is a pent-up supply of housing – that is homes that might be but aren’t available for sale. The shadow inventory, homes in the process of foreclosure (some definitions include homes with the potential of foreclosure) has worried economists since the start of the foreclosure crisis. While the fear has been that these homes, once they become bank owned, might overwhelm the market they have instead come on the market at a fairly measured pace as foreclosure time-lines stretched into years and have provided a source of low-cost homes for both first-time buyers and investors. The inventory is now becoming concentrated in a few judicial foreclosure states and REO (bank-owned homes) are available for sale.
What Fleming calls “the interest rate lockout” is a second constraint on supply and can also be considered a second source of shadow inventory. The wave of refinancing as interest rates bottomed out has resulted in almost half of all mortgaged homes having a mortgage rate under 4.5 percent. As rates rise these homeowners will have a disincentive to sell and lose that rate.
The third source of pent-up supply is the large numbers of homes that are underwater–or rather, under-equitied–with loan-to-value ratios of 81 percent or higher. While it doesn’t require any special process such as a short sale to sell these homes, the lack of equity serves as disincentive for the owners to attempt selling in the first place, as it limits their financing options on their next home. This, of course, assumes that the prospective home-sellers don’t have additional cash to bring to the table for their “move-up” purchase.
Fleming says that many of the causes of pent-up supply are mirrored on the demand side. Underwater houses are missing from the available supply of homes but their owners are also absent on the demand side. Even if they manage to sell their existing homes they have lost what has always been a significant source of the downpayment on the next one. While low-downpayment mortgages are still available they come at the price of FHA loan guarantees or private mortgage insurance.
Tight underwriting is another constraint on demand. Few loans are being originated for those with credit scores below 640 meaning that about one-fourth of the traditional credit-eligible populations is having problems accessing credit. Higher downpayment requirements (or the cost of the alternative) also keeps buyers on the sidelines.
Institutional investors turned to the single family market when prices and interest rates were low and rents were rising, shoring up the market at the lowest point in the housing bust. Now those investors are pulling back from the market, further lessening demand.
Finally, the decline of homeownership has led to an increase in renters, particularly among the young although renting has increased strongly in the pre-retirement age groups. The coming-of-age Millennial generation should be providing first-time buyers but many in this generation either have not formed their own households or are renting.
Fleming says the combination of these factors has resulted in modestly less demand this year compared to last. The decision to buy and/or sell are purely financial decisions he says, but “even so, they could continue to reduce turnover in the housing market for years to come. Welcome to the new housing normal.”