Magazine article Mortgage Banking

Housing's Modest Recovery: Down but Not Out

Magazine article Mortgage Banking

Housing's Modest Recovery: Down but Not Out

Article excerpt


AFTER DECLINING steadily during 1989 and 1990, housing market activity finally bottomed out in January 1991 and a recovery began. By June, combined new and existing home sales were 24 percent above the January trough. But then the recovery fizzled out, with total home sales declining in July, August and September. October saw a modest improvement, but the October level of sales was just 11 percent above the weak January level.

At this writing in early December, it looks as though this will be the weakest recovery of housing markets in decades and that 1991 levels of housing sales will be the lowest since 1984. Moreover, at about 890,000 units, starts of new, one- to four-family homes will be the lowest since the recession year of 1982.

With mortgage interest rates at their lowest level in 14 years, one would think that housing markets would be going gangbusters. "What's going on?" is the question asked by consumers, home builders, real estate brokers, mortgage lenders and policy makers.

Along with most other forecasters, the Mortgage Bankers Association of America (MBA) has for some time expected this to be a relatively modest recovery for the housing sector. For example, during the first 12 months of the three previous housing recoveries, sales of existing, single-family homes increased an average of 43 percent. During the current recovery, we expect an increase of just 15 to 16 percent. Similarly, sales of new single-family homes are expected to increase substantially less than the average of those previous three recoveries.

A major reason the current recovery of the housing markets has been so sluggish is that the recovery of the overall economy has been relatively weak. Extensive overbuilding of commercial real estate, the fiscal problems of federal, state and local governments and overleveraged balance sheets of businesses and consumers represent serious structural problems that will impede economic growth for some time. Indeed, while the economy did manage to grow in the third quarter of 1991, by October, employment and per-capita, real disposable income were still below year-earlier levels. The unemployment rate remained stuck near 7 percent.

Furthermore, this poor overall economic performance took a serious toll on consumer confidence. Following a steep plunge and equally steep rebound associated with the Gulf War, consumer confidence faltered and then plunged again due to widespread concern about job security and seeming political disarray. As shown in Chart 1, there is a close correlation between the level of confidence and the level of home sales. When confidence is low, fewer people are willing to reduce their cash reserves and increase their indebtedness in order to purchase a home.

The demographic dropoff

On the other side of the coin, there are both long-term and short-term forces that are more directly weakening the housing sector. Over the long-term, the underlying demographic demand for net additions to the stock of housing is gradually declining as the population ages. In the late 1970s, the baby-boom generation swelled the ranks of 25-to-34 year olds. It is during this period of their lives that most people establish independent households, and so roughly 2 million new households were being formed each year. As we enter the 1990s, the number of 25-to-34 year olds is actually declining while the 35-to-44 and 45-to-54 age groups are growing rapidly. As a result, the annual increase in the number of new households is estimated to be only about 1.3 million currently and is expected to decline to about 1.1 million per year by the end of this decade.

Another important fact about these demographic changes is that first-time homebuyers are becoming relatively less important in the housing market, while repeat or move-up buyers are becoming relatively more important. For many repeat buyers, moving up to a more expensive home is as much a portfolio decision as it is a shelter-consumption decision. …

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