Below are excerpts from a recent post from one of the best blogs around OfTwoMinds.com by Charles Hugh Smith
The foundations of housing--income, debt levels, housing formation and jobs--are all weak or declining. How can housing "recover" if its foundations are crumbling?
The real estate industry announces the housing recovery is finally underway every year. 2012 is no different from previous years: various positive data points are duly cherry-picked (multiple offers are back in West Hollywood, sales are up year-over-year in Las Vegas, inventory is down, etc.) to back up the claim the "bottom is in" and the recovery in sales and prices is rock-solid.
We understand the industry's extreme self-interest in attempting to re-inflate housing, but let's begin with the obvious question: what's the housing recovery based on? The standard answer is of course "super-low mortgage rates, courtesy of the Federal Reserve."
But people need a sufficient income to qualify to own a house, regardless of rates, so let's look at income by age, and focus on the key homebuying ages of 25 to 44. The only age group whose incomes continued rising during the past five years is the over 65 cohort--the very group who is "downsizing" or selling their homes to live in assisted living. The key homebuying cohorts have seen their incomes plummet since the housing bubble popped…
There are 75 million households that own a home, about 65% of all households, so how many people who don't already own are qualified to buy a house?
Given the poor prospects of full-time work, it's no surprise that household formation is trending down. It might seem that household formation correlates to population growth, but that is not the only factor: you need a decent income to afford an apartment or house of your own.
The future home buyers of America are staying in school to live off student loans and living in the basement/their old room at home. Since the interest rates on student loans can be higher than mortgage rates, $100,000 in student loans will cost as much as a mortgage. Everyone with a mortgage-sized student loan will be unable to qualify for a mortgage unless they vault into the top 15% income bracket. Everyone below that high-income tier will have too much debt to qualify and too little income to service hundreds of thousands of student-loan/mortgage debt. It boils down to one or the other: get student loans and forget owning a home, or avoid student loans and eventually hope to qualify for a mortgage. Few will be able to do both…
Millions of households are valiantly paying the mortgage even though their house is worth considerably less than the mortgage, i.e. they're underwater. The key take-away…is the enormous pool of homeowners whose primary incentive to keep paying their mortgage is the hope that housing prices recover sharply enough to enable them to get out from underneath their mortgage. If that hope fades, then the incentives to keep dumping money into the mortgage for decades fades, too.
For some of these underwater owners, it may be cheaper to keep paying the mortgage than it would be to rent, so it makes sense to stay put. Others may want to keep their credit unimpaired so they can borrow money for other purposes. The key point here is there is no equity to tap, and there is little equity being built. If the mortgage is $150,000 and the house is worth $100,000, then equity will finally appear when the principal loan balance dips below $100,000(or the homes value increases by 50%). If the owners have a standard 30-year mortgage, that principal reduction takes a long time.
Thanks for reading…Steve Jackson
561.602.1258
