Divided Housing Market Driving Wealth Inequality

Published in The Hill

December home sales fizzled as higher interest rates, which have risen since election night, evidently hampered some would-be buyers.

Existing-home sales fell 2.8 percent (from 5.65 million in November) to a 5.49 million seasonally adjusted annualized pace. The very low number of homes available for sale – the lowest since 1999 – also put a dent in consumers’ excitement.

Still, the year 2016 goes down as a good year for the housing market and for the nation’s homeowners. The annual total of 5.45 million unit sales is the best in a decade.
 
The median home price rose 5.2 percent in 2016. That brings a 5-year cumulative gain of 41 percent.

These solid gains in home prices across most of the country helped homeowners enlarge their housing equity.

Aggregate housing equity in 2011 was $6.2 trillion. At the end of 2016, it is estimated to be around $13.5 trillion. Homeowners are not only financially healthier, but are paying mortgages on time.

The serious delinquency rate has fallen to 2.96 percent of all mortgages — the lowest since 2007. At the worst point of the subprime mortgage crisis, the default rate reached 9.7 percent.

One glaring problem with current conditions is the historic low homeownership rate.

To be technical, ownership reached the lowest rate in 50 years in the second quarter of 2016 and there has not been much improvement since.

Therefore, we have healthier and happier homeowners, but fewer of them than before. This trend is the driving force behind the widening wealth inequality in the country.

Looking ahead to this year, there are both positive and negative factors for the housing market. Job gains should continue.

At a minimum, a net 2 million new job gains are expected to be added to the economy under 2 percent GDP growth assumptions.

Should GDP growth top 3 percent, as President Trump campaigned, then as many as 3 million net new jobs are a possibility. That widens the pool of potential homebuyers.

However, faster GDP and job gains coming from the likely Trump economic stimulus measures of lower taxes and higher government spending will result in higher inflation, higher budget deficits and higher interest rates.

My call is for three rounds of rate hikes by the Federal Reserve this year, and mortgage rates will likely move up closer to 5 percent by the year’s end.

The positive impact of job gains will be cancelled out by the negative impact of higher mortgage rates. The baseline forecast is for existing-home sales to squeak out a gain of only 1 to 2 percent this year.

Home prices are likely to surpass income growth for the sixth straight year, rising 4 percent.

If the mortgage credit box opens up while mortgage rates rise, then home sales will rise more strongly. There are good reasons for this to occur, as mortgage default rates sink and home values rise.

If, however, credit tightens from raising Federal Housing Administration insurance premiums, or from removing government guarantees for Fannie Mae and Freddie Mac-backed mortgages, then home sales will no doubt decline.

The first day announcement of the Trump Administration to cancel the last minute policy move by the Obama administration to lower the FHA insurance premiums could be just a knee-jerk political reaction by the Trump administration.  

After a thorough review of the FHA reserve fund and the current state of the housing market, it is highly probable for U.S. Department of Housing and Urban Development Secretary Ben Carson to recommend a premium reduction to help revive and expand the middle class.

A big wild card in the housing forecast will be how homebuilders respond.

Given population growth and falling inventory conditions in the country, housing starts should have been 1.5 to 1.6 million in recent past years, but that was not the case.

After averaging only 727,000 per year from 2008 to 2013, housing starts reached 1 million in 2014, 1.1 million in 2015, and 1.2 million in 2016.

That is grossly inadequate. It’s why housing costs — rents and home prices — are rising much faster than people’s incomes.

Should new home construction kick into high gear, say from relaxed construction-related regulations, then significantly better outcomes are to be expected.

Home sales will rise measurably, home prices will slow down to manageable growth, while consumer choices, jobs, and the homeownership rate will all increase.

This scenario is good for the industry, the economy, and most importantly, for the enlargement of a financially healthier middle-class.

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