Is There a Mouse in the House?

Tom Brown |

Since the financial crisis in 2008, home prices have been on an upward, one-way trajectory. According to the Federal Reserve (the Fed), the median price of a home sold in the US bottomed out in Q12009 at $208,400, and as of Q32018, was up to $325,200, representing a 56% increase. Beginning in the summer of 2018, the West, the country’s most expensive real estate region, actually experienced a decline in home prices. The Pending Home Sales Index (PHSI) is used as a leading indicator by the National Association of Realtors (NAR), and counts the number of contracts that were signed rather than actual closed sales. When the PHSI was released for November 2018, the index was down 7.7%, representing the sharpest year-over-year decline since June 2014. In fact, all four of the index’s regions (Northeast, Midwest, South, and West) were down year over year, igniting debate as to what could cause the decline and whether it will persist.

One possible explanation is the rise in interest rates. In November 2011, 30-year fixed mortgage rates hit their low at 3.32%, but had spiked up to 4.86% by October 2018. As of January 2019, 30-year fixed mortgage rates have receded, dropping to 4.45%, and alleviating some pressure on the cost of financing a home. However, the housing market seems to be much more sensitive to any movement in rates than in the past, despite the fact that they are still low on a historical basis, with the roughly 1% change in rates between 2011 and 2018 representing a more than 25% increase in the cost of financing.

Another possible explanation lies with wages. Beginning in January 2009, after the federal funds rate was near zero, nominal wage growth averaged 2.29%. During this same time period, the median household income grew 7.65% from $57,010 to $61,372. For wages to keep up with the price of homes, the median household income would need to be nearly $89,000. It is clear that slow wage growth along with a rapid increase in home prices may have squeezed some potential buyers out of the market entirely.

The current monthly supply of houses in the US is as high as it has been since August 2011, indicating that demand is declining, even though more recent wage growth has ticked up to more than 3% and rates have fallen slightly. This may signal concern that the decline in demand is influenced by themes outside of rates, slow wage growth, and increases in home prices.

The Fed recently highlighted the effects of soaring student loan debt on home purchases. Total student debt now sits at $1.5 trillion, higher than credit card and auto loan debt combined. This increasing debt burden has hamstrung graduates and possibly deprived them of the ability to save for a down payment. According to the Fed, home ownership by people ages 24 to 32 fell 9% between 2005 and 2014. The Fed looked at this time period due to the spike in delinquencies, which hurt credit reports and further complicated qualifying for a mortgage.

Short-term disruptions also have been to blame for the decline. The current federal government shutdown (the longest in history), has affected around 800,000 employees. Any plans these employees might have to buy a home surely would be curtailed by the uncertainty of working without pay, further squeezing another potential home-buying demographic out of the market.

The housing market in the US has enjoyed a strong recovery since the financial crisis, and during that time, homeowners have seen a drastic increase in the value of their homes. The current pullback may not totally curb the housing market’s future growth potential. However, the rapid increase in the prices of homes (which has not been met with commensurate wage growth), combined with massive student debt, the increasing cost of capital, and furloughed federal workers, certainly may put pressure on the housing market. It also may weigh on the most valuable asset of most consumers, whose overall spending accounts for roughly two-thirds of the US economy.