Academic journal article ABA Banking Journal

Fractures in the Housing Market

Academic journal article ABA Banking Journal

Fractures in the Housing Market

Article excerpt

I often use the housing market to illustrate the two kinds of changes that the economy faces.

Type 1 changes are cyclical, more short-lived in nature, and tend to work their way through the economy within a couple of quarters. Type 2 changes are more structural and take longer (years) to both form and unwind.

Historically, the housing market was considered a good example of a Type 1 change. The Federal Reserve would lower interest rates in response to either a recession or some other unwanted economic lull; mortgage refinancing and home buying would then reaccelerate. In the 2000s, the credit market for housing underwent a Type 2 shift, which has altered the way it responds to monetary policy. All the easing of credit in the world was not going to spur demand for homeowners who were over-indebted and/or underwater on their mortgages.

One of the greatest problems that the housing market currently faces is a lack of first-time homebuyers, who are necessary for trade-up buyers to sell to, so they can move up. First-time buyers accounted for a little more than one-quarter of the market for existing homebuyers during the first four months of the year-well below the 40% norm. Everything from larger down payments to an overhang of student debt and underemployment among new graduates is hurting the ability of young buyers to enter the market. This is undermining the size of the current and future pool of homebuyers.

The shadow supply of housing also has been slow to come back, with many existing homeowners either unable or unwilling to list their homes for sale, despite a fairly substantial increase in home values over the last year or so. …

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