For generations, single family housing development was a driver of US economic growth.Today, there is no single family housing industry to speak of. These 7 charts derived from this week’s release of new house sales data from the Census Bureau illustrates just how bad things are.
New house sales fell versus September 2015 and remain barely above the housing depression lows, a mere fraction of 2005 bubble levels.
This recovery has not even reached the levels reached at the bottom of the 1992 or 1974 recessions. It has gotten back to the 1982 recession low, but there are 45 million more households today than in 1982. This chart shows September sales in thousands for each year since 1972.
The number of full time jobs has returned to 2007 levels. Normally new house sales and jobs growth correlates somewhat. But while the number of jobs continued to grow since 2013, new home sales haven’t kept pace. That’s because most of the jobs being created are too low paying and too insecure to support the purchase of a home. Because of ZIRP, corporate executives find it more profitable to fund stock buybacks or buy competing companies and fire workers, than to invest in their workforces.
Homebuilders tell survey takers that business is great, but the facts say otherwise. The gap between what builders say and the actual level of sales is a measure of the uselessness of the survey. The NAHB survey is ruined by recency bias and survivorship bias. There are fewer builders dividing a smaller pie today than the housing bubble days. To the surviving builders, who mostly now build only high priced luxury housing, business looks good.
The Present Conditions Index represents one of the 3 questions which this survey asks of builders. This one asks them to rate sales as “good,” “fair” or “poor.” The index is almost back to the levels reached at the peak of the housing bubble.
While sales are terrible, price inflation rages. Economists don’t call it inflation becauses houses don’t count in inflation measures used by economists and the Fed, like the CPI and PCE Inflation measure favored by the Fed. Houses are considered assets, and economists and policy makers narrow the definition of “inflation” to exclude asset prices, particularly house prices. So the 13.5% year to year increase in new house prices is “appreciation,” not inflation.
While this measure is volatile, the trend is absolutely clear. It makes new housing less and less affordable for more and more American households. This is another artifact of ZIRP.
What growth there was in new home sales since the bottom in 2010 was only a result of the demographic trend of growing numbers of baby boomers entering the second home and retirement home markets. They moved South. Even that recovery has stalled this year. There has been no recovery whatsoever in the Northeast or the Midwest. September sales in the Northeast hit a new all time low. The West has continued to show some increase but its sales in September were only 36% of the level reached in 2005.
Considering that demographics drove most of the recovery in new house sales, we can deduce that ZIRP didn’t contribute to the recovery. Aging boomers are often cash buyers who would liquidate their existing home to make this move.
This chart shows September sales by region in thousands since 2002, just before the housing bubble took off.
At the US median household income of approximately $52,000 per year, households at or below the median can, with a small down payment, typically afford to purchase a home priced not more than $200,000 based on standard qualifying ratios. Sales in that price range just set a new September record low. Builders simply find it far more profitable to sell fewer houses at higher prices than to appeal to a mass market.
With near zero money costs, builders can afford to take longer to build larger houses with more expensive and profitable features. It enables them to build fewer, more profitable houses, and wait for the fewer upper income buyers to appear who can purchase them. Builders don’t need to build more houses faster to make money. They have no incentive to build mass market housing. In fact, their incentive has been to do the opposite. ZIRP has worked to the detriment the US median income family.
This chart shows total September sales in thousands for houses priced at $200,000 and less.
So the US housing market has had a 4 year dead cat bounce that hasn’t helped most Americans, hasn’t meaningfully contributed to US economic recovery, and now appears to be stalling. To the degree that this industry rebounded, it was driven by a demographic trend, not monetary policy. QE and ZIRP created perverse incentives to business to gamble and speculate, not to make real investments in growing their business in the US and providing good paying jobs that would enable American households to buy homes.