Let the finger pointing begin as home sales took a nosedive in February. The National Association of Realtors, shameless cheerleader of the commercial housing industry, admitted that existing single family home sales dropped over seven percent, a big bite. It may be too early to officially declare a housing crisis, but this news definitely pushes us in that direction. Wall St. certainly felt the chill, with the S&P 500 dipping in the wake of the news.
Despite the fact that sales are lower, housing prices have risen just over four percent over last year. The basic fundamentals of market economies suggest that every time prices go up, more buyers will be lost to the market. With younger people already saddled with stagnant wages, student loan debt and tighter qualifications for a mortgage, it should be no surprise they’re being shut out of the housing market in larger numbers.
Sales Go Down, Prices Go Up
The real problem for the housing market is that homeowners are not trading up. Part of that is the price barrier. The median price of a premium home in the U.S. is $542,805, compared to $267,845 for a mid-priced home. As wealth in America concentrates in fewer hands, mid-range homeowners are less able to make the jump to the higher price point.
Another problem is that entry level homes are increasingly being acquired by speculators to satisfy a hungry rental market. There’s no incentive for an investor to sell a home he or she can rent profitably. This has pushed prices of entry level homes higher at more than double the rate of mid- and premium priced homes. This price escalation is the reason twenty-four percent of starter home buyers are underwater on their mortgages, meaning they owe more on the balance than the house is worth.
Younger People Would Rather Rent
Between finances, mortgage rules and escalating prices, more young people are simply throwing in the towel on home buying. Renting also provides the advantage of mobility when it comes to employment; making it easier for people to move quickly to locations offering higher paying jobs. It also gives younger Americans the freedom to choose apartments and rentals closer to where they work, which cuts down or eliminates their need for a car. Such downscaling ripples through the rest of the economy, since renters don’t need to spend as much for furniture, appliances, electronics and other goods as homeowners. If it’s any consolation, this problem is not limited to the U.S.
Housing is a Bad Deal
Buying a house is also an increasingly bad deal economically. There’s no reason buying a home should be the time-consuming, expensive and convoluted process it is today. Mortgages have become inordinately complicated, and the process so riddled with added fees the mortgage industry seems to be taking lessons from the airline industry.
The reason the process is still so arduous is because the real estate industry likes it that way. Complexity makes it easier to justify six- and seven-percent broker commissions, which are increasingly out of step with the efficiency of modern technology.
Real estate services, such as Redfin, are starting to make inroads into the traditional real estate commission model, but it’s slow going. Real estate agents should be going the way of travel agents, but the industry holds an undue amount of sway in state and local governments. As a nation we’re standing on the verge of a housing crisis but we’re paralyzed because, in too many places, the problem is dictating the solution.