"…it should not be forgotten that it has taken massive bailouts, stimulus and financial supports to induce such relatively small amounts of activity." - Lance Roberts
A couple weeks ago, in A Horse Of A Different Color, we unpacked some interesting aspects of the current housing market recovery, its importance to the U.S. economy and its future sustainability. Since then we have read a number of interesting pieces that have provided enough fodder for a "part 2" post on the subject. As alluded to last time, the improvement in transactional activity is important but only represents what is happening at the margin in housing. Equally important is a dissection of the overall market to see what is going on beneath the surface. As Lance Roberts recently stated on the StreetTalkLive blog, "Housing is more than just the relatively few number of individuals, as compared to the total population, that are actively seeking to buy, rent or sell a home each month."
A recent headline on Bloomberg ran American Dream Slipping as Homeownership at 18-Year Low. This has got to be one of the most fascinating shifts that is occurring beneath the surface in the housing market, and the picture below showing the democratization and subsequent unraveling of homeownership over the past two decades is almost hard to believe. (Side Note: Last time we checked owning a house is not the embodiment of the American Dream.)
The simple fact is that fewer and fewer homes are being purchased by people intending to live in them. This is reflected in the chart below showing declines in owner occupied being offset by gains in renter occupied housing units.
This trend actually started prior to the bubble bursting and was driven by "investors" purchasing second and third homes as investment properties with the belief that they simply couldn't lose doing so. This priced many potential buyers out of the market and blew the last gust of air into the bubble before it popped. Since then the trend has been perpetuated by a shift in psychology away from home ownership towards renting. A house is no longer viewed as a dream come true, but rather through the lens of a spreadsheet with the promise of an attractive P&L (a dream come true in its own right). As we mentioned two weeks ago, much of the buying is coming from large institutions these days. StreetTalkLive provides an additional explanation for this:
While the Federal Reserve and the current Administration have tried a litany of programs to jump start the housing market nothing has worked as well as the "REO to Rent" program. With Fannie Mae/Freddie Mac, and the banks loaded with delinquent and vacant properties, the idea was to sell huge blocks of properties to institutional investors to be put out as rentals. This has worked very well.
In other words, fewer normal Americans are participating in the recent rebound than those that participated in the collapse. Perhaps this is why President Obama began advocating back in April that banks like Citigroup (C), JP Morgan Chase (JPM), and Wells Fargo (WFC) once again depend on government guarantees to loosen lending standards for subprime borrowers.
Another interesting piece of data to bear in mind when considering the increase in home prices is the dearth of supply current being experienced in the market. As the chart below shows, the current supply of new homes for sale is the lowest it's been in the last 50 years. This holds a lot of potential upside in terms of the capacity for new home construction (XHB, ITB) to play catch up, but it also implies that price increases are being driven as much, if not more so, by tight supply as by demand.
This, and several other very interesting pieces of housing data, are used in a recent blog post by Sober Look showing that rising home prices are actually no reason to celebrate for certain subsets of the American population. Make no mistake, the improvement in housing activity has, and will probably continue to be, a tailwind for the U.S. economy on many levels. But understanding the nature of the improvement is important as well. Quoting again from a November 2012 StreetTalkLive blog post:
There is no argument that housing has improved from the depths of the housing crash in 2010. However, while the housing market remains at very recessionary levels, recent analysis assumes that this has been a natural, and organic, recovery. Nothing could be further from the truth as analysts have somehow forgotten the trillions of dollars, and regulatory support, infused to generate that recovery.
The point here is that while the housing market has recovered - the media should be asking 'Is that all the recovery there is?' More importantly, why are economists, and analysts, not asking the question of 'What happens to the housing market when the various support programs end?' (emphasis added)
That pretty much sums it up.