Affordability Squeeze Depresses Home Sales

Prospective homebuyers are confronting what the National Association of Realtors (NAR) describes as “the most difficult affordability conditions in nearly 40 years.”

Read More

Perhaps one month, we’ll be able to tell you that the economic signals are clear, pointing unambiguously up or down. But not this month. Despite growing evidence that the economy is improving (albeit more slowly than most would like), and notwithstanding welcome strength in the March employment report, the economic indicators remain stubbornly mixed, enough so in the housing market that some analysts see a threat of a double-dip that will bring further home price declines before the market stabilizes.

Starting with the blast of positive employment news, employers added 162,000 workers to their payrolls last month, spreading the gains across sever sectors, including retailing, manufacturing, transportation, restaurants and hotels. But the payroll increase – the largest in three years and the third in the past five months – was not enough to budge the unemployment rate, which remained stuck at 9.7 percent. Before the Labor Department released the March figures, several other reports had noted an increase in the hiring of temporary workers – typically a precursor to employment growth. Half the companies responding to a recent survey by the Society of Human Resource management said they planned to boost hiring – the most saying ‘yes’ to that question in the past two years – possibly signaling the beginning of a sustainable hiring trend.

Economists have been insisting all year that the employment clouds will have to lift convincingly before the housing market can drag itself out of the financial doldrums, and if the March employment gains stick, stronger home sales may follow. But the February data were hardly encouraging. New home sales hit a record low annual pace of 308,000 for the month as newly completed homes competed unsuccessfully with cut-rate foreclosure sales. Analysts, who had predicted a slight increase, blamed the dismal winter weather in much of the country for the poor sales performance in the new home sector.

Blame it on the Weather

The weather was also blamed in part for the third consecutive month-over-month decline in existing home sales, which fell to a 5.02 million annual pace in February, the lowest level since last June. New home starts also declined by nearly 6 percent, but most of the dip was in the multi-family sector; residential starts fell by less than 1 percent, while single-family permits (a forward indicator) fell by only 0.2 percent. Some analysts have suggested that the continuing decline in starts is actually a positive sign; by limiting increases in the already swollen inventory of homes for sale, they suggest, builders are laying the groundwork for a strong recovery.

But with 3.25 million homes still seeking buyers, and some analysts predicting that foreclosures could add between 5 million and 6 million homes to that total this year, a recent Wall Street Journal article suggested, “it is far too early to say that housing is ready to rebound. Until that happens, it is better for everyone if home builders aren’t feeding the glut.”

Home prices, tracked in the closely watched Case-Shiller/Standard & Poor’s index, continue to hint at a recovery, increasing by 3 percent in January after a 0.4 percent decline in December. The year-over-year decline of 0.7 percent, the smallest in the past three years, represented good news to some analysts, but others focused less on the trend (upward) than on the pace (slowing), seeing in the loss of momentum cause for concern. “I think we’ve moved from a rebound phase to an ‘if-we-hang-on-everything-will-get-to-where-we-belong’ phase,” noted David Blitzer, who oversees the survey for Standard & Poor’s.

The large inventory of unsold homes, exacerbated by a foreclosure problem that continues to defy government efforts to solve it, continues to keep downward pressure on prices, while high unemployment and the nervousness that creates in people who are employed, limits the pool of buyers who are both able and willing to purchase homes.

For those reasons, among others, the extension of the homebuyer tax credit does not appear to have provided as much of a boost as the original credit provided last year, although the recent increase in the National Association of Realtors’ Pending Home Sales Index suggests that buyers may now be responding to the incentive. The NAR’s February index, based on purchase contracts signed that month, increased by 8.2 percent to 97.6 from a downwardly revised 90.2 in January possibly indicating “a second surge of home sales this spring,” Lawrence Yun, the NAR’s chief economist, suggested in a recent report. “Anecdotally,” he added, ‘we’re hearing about a rise of activity in recent weeks with ongoing reports of multiple offers in more markets, so the March data could demonstrate additional improvement from buyers responding to the tax credit.”

Eyeing the Tax Credit

Housing industry trade groups, concerned about the still sluggish recovery in home sales, are beginning to talk about the need to extend the tax credit again, despite questions about just how much buying it is stimulating. “You don’t make drug addicts go cold turkey,” Robert Shiller, co-creator of the Case-Shiller home price index, told the New York Times. Although he agrees with critics who say the credit “interferes with the market in an arbitrary way,” ending it now would be psychologically powerful,” he warned. “People will be in a bad mood about buying a house.”

Other analysts have been expressing concern about the Fed’s decision to end its purchase of mortgage bonds, warning that the withdrawal of that support could push mortgage rates higher. But the Fed’s view that the market no longer needs that backing appears to have been accurate, as rates have remained relatively stable since the purchase program ended last month.

“What we’re seeing is an effective handoff occurring between the Fed and industry buyers, such as banks and pension funds,” Christopher Seibold, chief investment officer at Advantis Capital Management, told Bloomberg News. “I thought the Fed’s exit would leave a bigger void,” he admitted.

Scott Simon, managing director of Pacific Investment Management Company, was less surprised by the market-s non-reaction to the Fed’s move. “It’s not as though [mortgage] credit is all of a sudden going to become much more difficult to get,” he told the Wall Street Journal. “The big problem in the housing market [isn’t financing],” he added, “it’s unemployment.”

Fed Fears

Federal Reserve policy makers apparently share that concern. In the statement released after the March meeting of the Federal Open Market Committee (FOMC), Fed officials repeated their intention to keep interest rates “exceptionally low” for the foreseeable future. The minutes of the meeting underscore that concern. “While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter,” the minutes report, “participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth.”

Analysts, who had been predicting that the Fed would begin raising interest rates as early as this summer, now say that reversal won’t come until September at the earliest, and possibly not until well into next year. The Fed, they say, is clearly more concerned that raising rates prematurely could derail the recovery than that delaying the rate increase could fuel inflation.

“They want to see the whites of the eyes of everything, from strong growth to many months of employment,” Stephen Stanley, chief economist at Pierpont Securities LLC, told Bloomberg. “They want to see inflation accelerate so they are sure we are not going to get deflation, and they probably want to see banks start to lend again.”