Practical Economics


Housing’s Revival Losing Some Heat

Gillian B. White

Problem number one: Not enough growth in jobs and wages.



Don’t expect the housing market to rev up the economy much this year. After two years of robust gains in construction, sales and especially home values, growth is now easing.

SEE ALSO: 7 Features Home Buyers Want Most

Overall, housing will add about 0.2 of a percentage point to GDP this year—roughly the same economic lift that it provided in most of the 1980s and 1990s, but just half of the boost the sector delivered during the boom years of 2002-2006. In 2014, look for housing to add about a third less than its contribution in 2012-2013.

So what’s behind the slowing? It’s a confluence of factors rather than a single problem. First, the exceptionally tough winter took a toll, slashing first-quarter sales and construction starts as ice and snow kept both builders and buyers at home. And now strong head winds will keep the housing sector operating at low speed. Both supply and demand will remain muted, with the exception of some markets, largely in the West and South, where strong job growth is spurring buying.

Homeownership rates aren’t picking up much. Though the current rate of 65% equals the average from 1980 to 1999, 14 years of gains have been lost and no pickup is likely before next year.

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First-time buyers, particularly, are struggling. Young adults generally have little savings, face a rough job market and are often heavily laden with student debt. This means difficulty meeting tougher credit standards, especially the stricter debt-to-income requirements put in place in January by new Qualified Mortgage rules.

Competition with all-cash buyers, who are now 32% of the market, hits young first-time buyers especially hard. As a result, first-time home buyers now account for less than 30% of existing-home sales and about 16% of new-home sales. Historical averages are about 35% and 25%, respectively. Stricter Federal Housing Administration mortgage requirements play a role, too. Higher mortgage insurance premiums make loans less affordable for low-income households.

But the big stumbling block is lackluster growth in jobs and wages. They’re just not expanding quickly enough to fuel a vigorous home-buying market, and the lack of wage growth means homes with quickly rising prices are unaffordable for many.

Still, demand will likely grow faster than supply. Many builders, the vast majority of them small and medium companies, are finding it tough to secure adequate lines of credit to operate after going through the recession wringer. Skilled workers, who left construction in droves, are now hard to find, and employers are straining to attract and hold on to them. And rising costs of materials, from lumber to pipes to drywall, are squeezing already-thin margins.

These challenges mean growth in building starts will slow, rising 11% this year, down from 19% in 2013. Look for new-home sales to climb by just 8%, less than half the 2013 pace. And sales of existing homes will likely total about 1.5% fewer than in 2013.

Home prices will continue to rise, though at a much more moderate pace than in 2012 and 2013. Figure on about a 4% hike, averaged across the U.S., by year-end—a significant slowing from last year’s double-digit growth.



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