Housing market is not as healthy as hyped, very vulnerable

 A terrible contagion no one is addressing  JMHO

As you are aware from my various writings the housing industry plays a critical role in the U.S. economy by contributing 15%-18% to GDP every year and homeownership accounts for a quarter of American household net worth. So, when so-called analysts and experts start hinting at a “housing crisis” it should spark concern, uncertainty, and maybe even some fear.  There is no single economic definition of a housing crisis.  Utter the phrase “subprime mortgage crisis” or “2008 housing market crash” to any old-time real estate agent, or what was unfortunate homeowner caught in the cesspool or economist/investor who lived and worked through that challenging time, and you’re likely to receive a trembling type response. The trouble began when banks started to greatly relax their lending criteria (with consent from regulators and the FED) and handing out subprime loans to borrowers who would not have qualified under ordinary circumstances. No down payment, the banks saw no problem as back them many lenders required little to no upfront cash to finance a home. Sub-par to no credit, again there were blinders on as there were no conceived contagions as banks across the country had managed to significantly ease their credit requirements to make it possible for more un-worthy folks to secure loans that they should not have gotten nor could they afford...thereafter buoyed by the sudden ability to get home loans like they were practically “free”, buyers flooded the market. Amid the growing demand, house prices continued their steady rocket ride (like they have been again in 2017 through 2020). Far too many borrowers took on high-risk loans, counting on being able to refinance later due to pent up new-found equity. But when house prices dropped like a rock more than 18% in the fall of 2008 and interest rates started to rise, many homeowners found themselves stuck in vastly unsustainable mortgages, sometimes owing significantly more than the value of their homes (many 25-40% more). When demand crashed due to folk’s inability to meet their mortgage obligations, the pendulum swung the other way, and there was way too much supply chasing too little demand. During 2008, 3.1 million foreclosures were filed, the equivalent of one out of every 54 homes and homeowners lost over $3.73 trillion in home equity.

We now have a Covid-19 pandemic rental housing crisis; as with the onset of the Covid-19, 20.5 million folks suddenly lost their jobs and unemployment skyrocketed 3.5% in Feb. 2020 to 14.7% in April 2020 a far greater rise than the 8.8 million jobs lost in the aftermath of the Great Recession. The abrupt and extreme severe recession prompted me and many others to believe that there could be another housing crash similar to 2008!

However, for the time being, the housing market held strong post-pandemic as the 2008 style housing crash has yet to materialize in 2020 it will likely be a 2021 event as through the CARES Act, the government issued forbearance plans allowing mortgage holders to pause or reduce mortgage payments for a limited period of time. So far, this has prevented a glut of mortgage defaults and foreclosures. Improvements in the jobs market since April (unemployment sits at 6.9% as of Oct. 2020) have helped the situation somewhat for homeowners to get back on track with their mortgage.

A lack of new construction, low mortgage interest rates, and a surge of pandemic home purchases have depressed supply near record lows. As a result, the median sale price of existing homes skyrocketed over 15% in October, according to the National Association of Realtors.

The rental market has not fared as well as owned housing post-pandemic, and that is especially true for cities with economies centered on oil and energy and major metro areas with a heavy concentration of professional and technical workers. Where the asking price for rent is declining sharply, landlords are struggling to cover their mortgage, and where the cost of rent is increasing, unemployed renters are finding it hard to make ends meet. Experts estimate that over the next several months, 30-40 million Americans could be at risk of eviction.

The pandemic is causing grave concern, particularly in the apartment market, as apartment dwellers are quite disproportionately hit with job loss and rent payment troubles. This contagion will fester down throughout the apartment market complex. Many apartments are now owned by mega REITs and conglomerates and this will inevitably result in availability and affordability issues in the months ahead.

Perhaps the most basic form of a housing crisis boils down to people not being able to afford the available homes and apartments, a situation that has plagued the country for far too many years. In 1970, the average household income in the U.S. was $8,730 and the average home price was $17,000. To qualify for this loan, a buyer would need a down payment of about $5,238, or about 60% of their annual gross income. Today, the average U.S. household income is $64,400 per year, or about $5,700 per month. However, the average home price in the U.S. has rocketed to about $387,000 as of the 3^rd quarter of 2020. In this scenario, a 20% down payment would exceed the entire annual household income. This situation is even worse among first-time buyers, and builders report record low numbers of first-time buyers in the pipeline.

With 2020 now almost over, we can calculate how many times the benchmark 30-year fixed mortgage has hit record lows this past year. And according to the latest weekly update from Freddie Mac which showed that the 30-year FRM dropped another 1 basis point to a fresh-all time low 2.66%, we can now declare that in 2020 the 30-year mortgage hit a record low on 16 weekly occasions...a record. The chart below depicts all you need to know, showing the 30-year mortgage yield plunging by half from 5.0% in late 2018 to its current level just above 2.50%

This massive plunge in borrowing costs has fuel a new housing bubble in my opinion that has helped boost the economy during the pandemic. Lower rates, combined with an exodus from big cities to ride out the pandemic, have pushed buyers into the market. Current owners have also been able to save money by refinancing their loans. The latest housing data suggested weakness dead ahead: new-home sales tumbled to a five-month low in November, dropping 11% in a sign the market is cooling off as coronavirus cases surge, while existing homes were also down last month, slipping for the first time in six months. That came as the median selling price jumped 14.6%, the 4^th straight month of double-digit increases.

I find it remarkably interesting and very economically unfriendly that homeownership is unaffordable for the average wage earner in 75% of counties surveyed across the U.S. That is according to a report from Attom Data Solutions, which studied more than 400 counties covering about 200 million folks. The most cost-burdened areas were on the east and west coasts, including the top five. Eighteen of the top 25 priciest markets were in New York or California.

To be able to afford a median-priced home in New York County (Manhattan) a person had to earn $341,401 a year, according to the report. That made it the costliest county in the nation.

A big driver of housing unaffordability is wage growth lagging behind home price appreciation. The report found that home price appreciation outpaced average weekly wage growth in the 3^rd quarter in two-thirds of the counties. Home prices are still rising and are projected to continue to grow. Attom basically determines home affordability by calculating the percentage of average wages needed to make monthly house payments on a median-priced home, with a 30-year fixed-rate mortgage and a 3% down payment. Virus pandemic concerns are still quite valid and may show up in the coming months, which could hurt prices as well as affordability. That remains a significant potential cloud hanging over the market.

Harvard University’s State of the Nation’s Housing 2020 report, arrives at an exceptional time for the U.S. Four key findings from the report are particularly relevant.

Persistent unaffordability

·        The coronavirus pandemic came as the U.S. was facing crisis-level housing affordability issues, especially for low-income households.

·        In 2019, 37.1 million households were “housing cost-burdened,” spending 33% or more of their income on housing.

·        Interesting of all households nationwide close to 18 million in total were “severely cost-burdened,” spending 50% or more of their income on housing.

Renters were more cost-burdened than homeowners, with 46% of renters cost-burdened compared to 21% of homeowners. Also, 24% of renters and 9% of homeowners were severely cost-burdened. In total, though, homeowners made up 40% of all households with severe housing cost burdens, given the larger number of homeowners in the overall population.

Cost burdens were greatest among lower-income households. For households earning less than $30,000, 81% of renters and 64% of homeowners were cost-burdened. This includes 57% of renters and 43% of homeowners with severe cost burdens. For those earning between $30,000 and $45,000, 57% of renters and 36% of homeowners were cost-burdened, including 15% of renters and 13% of homeowners with severe cost burdens.

High housing cost burdens were driven by persistently high housing costs relative to income. In 2019, the median sales price of existing single-family homes rose faster than the median household income for an eighth straight year. It is highly likely that when cost burden data for 2020 is available next year, it will likely show greater unaffordability still in the homeownership market. Despite the spike in unemployment in 2020, home prices were up 5.7% in September year over year according to the S&P CoreLogic Case-Shiller Home Price Index.

The economic fallout of the pandemic, combined with ongoing housing unaffordability put millions of renters and homeowners at risk of losing their homes in 2020. Despite various policy protections for renters and homeowners enacted during the crisis (they screwed landlords), housing security remains fragile for far too many Americans heading into 2021.

According to some dismal data from the Census Bureau’s Household Pulse Survey in late September, 36% of all homeowners lost employment income between March and the end of September. Among homeowners, income loss was most common for those earning less than $25,000 (44%), Hispanic homeowners (49%) and Black homeowners (41%).  Homeowners of color earning between $25,000 and $50,000 were also disproportionately behind on mortgage payments.

Supply shortages, down payment barriers and tighter credit continued to pose challenges for renters seeking to achieve their dream of homeownership. The report highlights Freddie Mac’s 2019 Profile of Today’s Renter and Homeowner survey, which found that 41% of respondents considered their inability to afford monthly mortgage payments a “major obstacle” to becoming a homeowner. The same survey found nearly half of current renters believed lack of enough money for upfront costs, like the down payment, would be a major obstacle to buying a home. Meanwhile, lending standards tightened considerably during the past six years. As evidence, the report cites the Mortgage Bankers Association’s Mortgage Credit Availability Index, which declined by 34% from February to September 2020, reaching its lowest level since 2014.

Greater caution from lenders following the pandemic, and depleted savings due to job cutbacks and reduced income overall pose major ongoing barriers to homeownership heading into 2021.