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Monday, March 1, 2021

Housing market takes wandering path to recovery

For reasons I have yet to fully appreciate, there is lot of confusion about the state of residential real estate in the U.S. Simply by looking at some of the data we can clear up a lot of the muddle.

The short explanation is that housing, along with the rest of the economy, has been recovering, albeit slowly.

There are five elements to consider when assessing the state of housing in the U.S.: homeownership rates, mortgage rates, low equity/low inventory, uneven recovery, and luxury vs. ordinary home sales

Let’s take a closer look at these five elements:

• Homeownership rates: According to the Census Bureau, the U.S. home ownership rate has fallen to 63.7 percent, the lowest since 1989. Normally this rate is pretty stable and holds in the mid-60s (though it soared to more than 69 percent during the housing bubble).

In recent years, a lot of baby boomers have been retiring, leaving the ranks of homeowners. But we also have had relatively weak household formation – millennials living in their parent’s basements and all that. Combining these two demographic trends gives you a recipe for low home ownership rates.

We are beginning to see signs that household formation is turning around.

• Mortgages rates: Interest rates have been a great help to homebuyers. Since early 2011, they have been lower than 5 percent and for much of that time they have been at or near record lows. If we take the Federal Reserve at its word and we begin to see a gradual increase in short-term rates, those lows are behind us.

• Low equity/low inventory: The two are related. As Bloomberg View writer Jonathan Miller has noted, “Sellers, when they sell, become buyers (or renters) and with more than 40 percent of mortgage holders having low or negative equity, they don’t qualify for the trade up. We have been so focused on negative equity that we’ve paid short shrift to the impact of low equity.”

• Uneven recovery: Like so much else in the post-credit crisis recovery, housing gains have also been very uneven. Travel around the country, and this becomes obvious. In places where the local economy is doing well, the housing market is also doing well.

• Luxury versus ordinary home sales: How disparate are housing valuations and sales? Consider this data point from the Demand Institute’s 2000 Cities Report: As of 2012, the top 10 percent of U.S. housing stock “held 52 percent of aggregate housing value, worth nearly $4.4 trillion . . . Contrast this with the bottom 40 percent, which accounted for just 8 percent of the housing value of all 2,200 communities.”

Thus, we can see that the state of the U.S. housing recovery is similar to that of the economy overall: It is slowly improving, but faces headwinds. It remains highly regional, unevenly distributed, with the top end doing better than the rest.

Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.

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