Anthony Sanders, professor of real estate finance at George Mason University, said he’s not as optimistic about the housing recovery. His less-than-confident forecast followed a speech by Carrington Holdings’ Rick Sharga, who remains confident the market is not in a bubble.
According to Sanders, the housing market is showing strong signs of improvement, but headwinds are present. Slow employment recovery, declining prosperity among lower- and middle-income households and growing government involvement seem to be slowing the market, he said.
“Since 1970, our lower- and middle-income households are getting poorer; their wages are declining,” said Sanders, who further claimed that as a nation we’re not really prospering, with the exception of the top 5%.
Trulia Chief Economist Jed Kolko followed Sanders by breaking down the recovery from a local view. “It all comes down to what’s happening locally,” Kolko noted.
According to Kolko, geography plays a large role in the affordability of homes. For instance, in Kolko’s hometown of San Francisco, where potential land development is extremely limited, prices are unreasonably high.
In some local markets, where land is ample, buying a home is actually more affordable than renting. “We’ve recently hit the point in this recovery where prices are rising faster than rents,” said Kolko, who noted this shift is only around three months old.
According to a recent study by Trulia (TRLA), prices are up 7.2% nationwide year-over-year in March, while single-family rents have flatted, up only 0.1%.
Kolko adds that for markets seeing very strong price growth, but weak job growth, it is safe to assume the growth is investor driven. Conversely, price growth mirroring job growth is reflective of greater demand by consumers and less driven by investors.
The most notable difference, adds Kolko, is that it’s currently 44% cheaper to buy then rent nationally, although this varies in different metros.
After Kolko spoke, Mark Palim, director of economics at Fannie Mae, voiced his concerns on household formation, which is below trend due to the recession coupled with slow job growth.
“What’s really notable to me is the large drop we had in household formation before recession,” said Palim, who noted that we’re not back to the average line quite yet, although it does seem to be rising quite nicely.
Palim says the households that are forming are renters. “As people coming into forming a household they really do become renters,” said Palim. So will they eventually transition to homeownership?
Despite a stark decline in homeownership rates (with the biggest drop being among those ages 25 to 34), the vast majority of young renters say they are likely to buy at some point in the future. In fact, 91% of those between the ages of 25 and 34 believe they will become homeowners in the future.
“The aspiration to own is across large sections of demographics,” added Palim.
Those who do hope to potentially own a home reported the ability to afford the purchase and upkeep of the house as a major concern. According to Palim, most current renters can’t afford much of a downpayment.
However, with a significant number of consumers heading to the peak age of homeownership (Generation Y), Palim noted that low interest rates will be hugely beneficial to those who can qualify.
