What Housing Slowdown?

There’s been a fair bit of commentary lately about the apparent housing slowdown. Possible causes include an absence of buyers, the decline of the investor buyer, low credit scores, and declining affordability.

Do any of these anecdotal problems actually exist? And if so, what effect might they have on the housing market?

Absence of first-time buyers. This is a two-part question, involving demographics/household formation and financial ability. Let’s look at the demographics piece:

As you can see, during the post-crash years from 2000 to 2002, about 53 houses per 1,000 households were sold on a monthly basis. We crashed down to about 30 per thousand and are now at only around 40 per thousand. Even to recover to the post-dot-com bust level will require a lot more activity than we see today.

Why does this matter? Housing demand depends on household formation, which was depressed during the crisis. We’re now in a catch-up period but remain well away from even the depressed post-crash period of the early 2000s. Demand should be there. Buyers may have stayed away in the first quarter—due to weather, I believe—but you can see the recovery. It will continue.

Decline of the investor buyer. Another explanation for the decline in sales during the latter half of 2013 and the start of 2014 is decreased investor activity. If that's the case (and it’s probably at least partially true), it doesn’t eliminate the demographic argument for strength we just discussed. In fact, it solidifies it, as there’s more pent-up demand.

Poor buyer credit scores. If buyers can’t get a mortgage, there will be no effective demand for housing. Very true, but the average consumer credit score actually continues to rise, as you can see below:

This probably reflects the general delevering of consumers over the past several years as they’ve paid down debt, as well as current low interest rates. Credit scores aren’t an issue, but perhaps banks aren’t lending even with good credit?

As this chart shows, the annual change in the net number of mortgage accounts has moved into positive territory for the first time in years, probably due to a combination of fewer foreclosures and more new loans. But as foreclosures are at very low levels compared with the past several years, I see it as evidence that mortgage lending is picking up.

Declining affordability. The last explanation for a slowdown is declining affordability. With prices rising and rates up, the argument goes, people simply can’t afford to buy.

Housing is certainly less affordable than it has been over the past five years. But it’s still more affordable than during the 2000s before the financial crisis, including after the dot-com bust. The average household, in fact, can afford a mortgage on more than 1.5 houses. Mortgage affordability isn’t a significant constraint.

Here’s the question: will prices continue to rise?

Against all of these arguments is the simple fact that housing prices continue to rise. True, the momentum has slowed, but up is still better than down.

Whether the rise continues depends on buyers being able and willing to buy. Looking at car sales—which are similar to house sales in that they're long term and require financing—we see that, with about an eight-month lag, they track quite well.

Note that house sales exceeded car sales during the boom and have lagged them since. Under normal market conditions, like the early 2000s, they should be pretty close—which suggests that increasing home sales may close the gap.

The other factor that supports continued increases in home prices is simple supply and demand, as shown in the chart below. Although it does imply a slowdown in growth, prices should still increase around 5 percent—well above inflation. This slowing is actually healthy and will help prevent the formation of another bubble.

Conclusion: a healthy moderation in growth

The data doesn’t show a slowdown in the housing market; at worst, it suggests a moderation in growth, which would be healthy. Of course, this depends on the economy continuing its strong performance, but that also appears likely.