The price of an existing home grew 4.46 percent last year, according to the Case Shiller Home Price Index. Sales of existing homes, while not at pre-recession peaks, were up, but new home sales and construction were still weak.
New home sales are a particularly key figure to focus on. While existing home sales are important, an existing home doesn’t help GDP the same way a brand new home does, and a lot of new homes aren’t being built — because people aren’t buying them.
“The housing recovery is faltering. While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession ... The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence,” says David Blitzer in a statement, manager of the S&P Dow Jones Index Committee, who oversees the Case Shiller Home Price Index.
Why does housing remain sluggish? Why does it still seem haunted by the recession while other economic indicators are improving?
1.“It’s exceedingly expensive and I don’t have the financial capability to do that”: Those are the words of Phil Litman, a random person on the street. Random, but also typical. “I mean if I had an unlimited source of financing, I’d rather buy, yes, but in my current situation right now, I’d rather rent.” It’s basically that, in the words of Mark Willis, executive director of NYU’s Furman Center, a lot of people just don’t have a lot of money. “There are parts of the market ... having to deal with relatively stagnant incomes,” he says.
2. Millennials: Young people, the would be first-time homebuyers, face financial instability. Chris Mayer teaches Real Estate at Columbia Business School, and says there are signs of this in demographic data. “People are getting married later, and having kids later and settling down later.”
3. The rise of renting: Connected, perhaps, to prolonged financial instability for millennials, is the shift towards renting. “Renter construction rate still up and up pretty dramatically – 20% over the year,” says Susan Wachter, professor of real estate and finance at the Wharton School.
4. Credit, still tight: People are renting, not just because buying is expensive, but because borrowing is still hard. “The uneven recovery in construction is fundamentally reflective of tight credit conditions,” says Wachter. Interest rates may be low, but that doesn’t guarantee someone will qualify for a loan.
5. Something else entirely: As much as we like to pin our dismal housing sector on the recession that just won’t die, the reality is there were changes in housing happening way before it. “Homeownership actually peaked in 2004, before the recession, in fact, before the clear boom in housing peaked,” says S&P Dow Jones’ David Blitzer. He says the recession may have just accelerated a larger trend that was happening anyway.
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