Housing-Recovery Fears Overblown?

By Nick Timiraos, The Wall Street Journal

Oct. 2, 2013.

Fear that the housing market’s recovery is stalling has been overdone, Goldman Sachs economists say in a new report.

The paper — titled “Where is the pent-up housing demand?” — suggests that housing demand among the young has been suppressed because of cyclical issues not structural ones.

Homeownership hasn’t fallen out of favor and student-debt levels aren’t the main culprits for lower housing demand among young buyers, economists Hui Shan and Eli Hackel write. Instead, they suggest that the economic downturn is most responsible for muted homeownership gains among younger households, and that the “pent-up” housing demand will improve in step with economic gains.

The bear case on housing goes something like this: The current “recovery” has been driven to an unhealthy degree by low interest rates and investor purchases of homes, particularly by large institutions. Meanwhile, traditional owner-occupant buyers can’t qualify for loans, because of some combination of having too much debt (especially student loans for younger buyers), stagnant incomes and tight credit standards.

Shan and Hackel aren’t convinced.

“We think the pessimism about the housing recovery is overdone,” they write.

The authors focus on the homeownership rate among those between ages 25 and 44, the largest cohort of first-time buyers and move-up buyers. Compared to the 1985-1994 period (when the overall homeownership rate was mostly flat), homeownership among 25-to-44 year olds was reduced by around 1.1 million owners last year. Most of the shortfall, they conclude, comes from medium-to-high income households. They turn to three reasons that might be the case:

1. Could it be that homeownership simply isn’t cool anymore? Not really. Surveys show the vast majority of non-homeowners under age 49 still aspire to homeownership.
2. Could it be that young renters don’t have enough money to make a down payment or enough income to qualify for a mortgage? Not so much, they find. Using data from the 2010 Census, they find that among 25-to-44-year-old renters with incomes above $50,000, around 40 percent have at least $25,000 in financial wealth — enough for a 10 percent down payment on the median priced U.S. house. Nearly half of younger renters with at least $50,000 in income have total debts of less than 5% of their incomes, meaning they should have the capacity to take out a mortgage for a home purchase.
3. Could young households have delayed purchases because of the severe shock that housing and labor markets went through? The authors conclude that this is the most likely explanation. Homeownership rates declined less in states where the job market experienced less stress.

In states where unemployment fell by less than one percentage point below their long-run average, the homeownership rates of younger renters with incomes over $50,000 remained similar in 2012 to their 1985-94 levels. But in states where unemployment rates were more than one percentage point above their long-run average, homeownership rates for younger renters fell by four percentage points compared to their 1985-94 levels.

“As the housing and labor markets gradually recover, we expect to see the homeownership rate in this population normalize,” Shan and Hackel write. Moreover, population growth among the so-called “echo boom” generation of children born to the baby boomers, who are just now beginning to form households, “implies upward pressure on housing demand.”

Posted in: Goldman Sachs, home prices, housing recovery, real estate