TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/343616
Feature 26 | Th e M Rep o RT conceded, "Lending standards show some signs of easing recently but still remain a con- straint to a more robust housing recovery." QE Recovery Falls Short of Stated Goals W ith lending tightening somewhat and Q1 produc- ing softer housing results, no group is more worried than the Fed. After all, years of interven- tionist monetary policies were de- signed specifically to lift housing. Fed chair Janet Yellen took over the reins of the central bank just five months ago. A short four months into her term, Yellen found herself sitting in front of Congress, describing Q1 housing data as disappointing and worth watching. The reality is the Fed's post-recession movements on interest rates and mortgage bond purchases have already put hous- ing under its microscope. For some monetary policy analysts, the scrutiny and focus of the Fed failed to usher in the robust housing recovery that mon- etary policymakers desired. Mark Calabria, a housing analyst with the Cato Institute, says the Fed sees its own mission as largely in- tertwined with mortgage finance. "Housing is perhaps the most important transmission mechanism for monetary policy," Calabria said when discussing the Fed's perspective. "Given current monetary policy and ex- traordinary support of the hous- ing market (Fed MBS purchases), the housing market should be booming, based on past relation- ships between Fed policy and the housing market." Yet a new housing boom is not necessarily on the horizon and millennial buyers are absent, Calabria notes. "So their models are telling them one thing, but reality is behaving differently," Calabria explained. In the market, an underly- ing belief surfaced, suggesting that once the Fed pumped the economy with enough stimulus, it would stabilize and young buyers would swoop in, causing demand to soar. Those predic- tions are out of sync with today's market reality, according to Jeff Taylor with Digital Risk. "Further, household formation, especially upon those younger than 35, is also way below norms," Taylor said. "However, there are some signs that house- hold formation may be on the rise and consumer confidence is on the mend." But for Taylor, nothing in the market is solidified enough to declare victory. "The fundamental issue is a lack of demand; too many first-time buyers are fearful and unable to qualify," he pointed out. "Move-up buyers are limited as well. While housing prices have risen, the typi- cal buyer does not have enough confidence in his job security and in housing price trends. While there has been a surge in housing prices for the last year, that surge has diminished in all but a small subset of MSAs: San Francisco, Dallas, Miami, Washington, D.C.— to name a few." Making matters worse is the slowdown in refinancing activity that hit last year. Another shoe could drop on the market once all-cash buyers and investors are no longer hunting for deals. As Taylor pointed out, "December sales were 40 percent all-cash, investor buyers. However, as they move out of the market (too few good buys), there is an insuf- ficient number of retail buyers to make up for their loss." If the idea was for first-time homebuyers (mainly those under 35) to jump into the market to pick up the slack, this demo- graphic is either late to the party or skipping it altogether. And while the Fed may want to do more, it has likely reached a tipping point—the place where it can do nothing more but wait for a recovery predicated namely on the creation of jobs, rising income, and debt deleveraging. "It is in part a housing policy issue, but it's more so a jobs/ income issue," Calabria said when discussing the slowdown in housing and the missing, younger buyers. "Until we see stronger job and income growth, the housing market is going to be constrained. Prices in many places are just out of whack with incomes. Something has to give." One thing Calabria is confi- dent in is his belief that the Fed has no more slack to give. "My money is on the fact that the Fed will stick with its cur- rent pace of tapering," Calabria said. The Fed is unlikely to publicly admit it, but the central bank is likely to believe they've done all that they can, he adds. "Of course some of us would say they've done more harm than good," Calabria noted. Digital Risk's Taylor doesn't see the Fed taking off the hous- ing market's training wheels until unemployment is much lower. "Tapering will not be a promi- nent feature of Fed policy until the unemployment rate dips be- low 6 percent and stays there for months—hopefully complemented by an increase in labor participa- tion," he explained. But today's labor market and employment participation levels are not as promising for young up- starts who real estate agents want to target with houses. Student loan debt is now above a trillion, and millennials are still trying to shake off images of a generation stuck in chronic cycles of unemployment, underemployment, rising home prices, and comparatively lower income levels. "There is a secondary issue: the job market is now favoring the very highly skilled; there are vast differences in the unemploy- ment rate; and incomes for those with post-graduate education and work experience, suggesting that the newly minted BA is at a disadvantage," Taylor pointed out. "Those with only a high school degree (or less) are severely disadvantaged. High amounts of student debt are a drag as well." The only silver lining is the potential for increased earnings as students gain more training and spend more years on the job. "A recent MBA graduate from a top 100 school will most likely receive multiple offers—at ap- proximately $125,000 per annum," Taylor said. "But those educa- tions leave this graduate with a $100,000 student loan debt, crowding out the availability of funds for housing purchase." A big barrier to new home for- mation is the decision of many in the under-35 age group to either remain at home to deal with eco- nomic or employment issues, or to live with their parents to save for a down payment on a home. According to 2014 data from Gallup, 14 percent of Americans aged 24 to 34 are still living with their parents. About half of those in the same group are students in the 18-to-23 age category. Given the financial and eco- nomic struggles of this genera- tion, the millennials are part of a larger macroeconomic trend that seems to be derailing, or at least delaying, a full housing recovery. What's clear is that a full turn- around in housing is no longer contingent on how the Fed or government responds. In essence, the young man or woman on the street holds much more sway in determin- ing housing's future. The question is, will they step up, and if so, when? "Markets are making good progress recovering from the excesses of the housing boom and bust," NAHB's Denk concluded. "But a strong economy, particular- ly an improving labor market in the background, would help."