Home Sales Haven't Recovered With First-Time Buyers AWOL

August 21, 2014

It's been five years since the Great Recession ended in mid-2009.

Yet despite spikes in several markets and recent job growth, sluggish demand is holding back a full housing recovery.

The biggest reasons cited by housing watchers: Demand for home purchases from first-time buyers has not returned and affordability faces headwinds.

While existing-home sales rose 2.4% in July to an annual pace of 5.15 million, according to the National Association of Realtors, they were still below the 7.1 million peak in 2005. And though new-home starts are trending up, not all turn into a sale, says David Crowe, chief economist with the National Association of Home Builders.

Actual sales are still running at about half the pace of their regular pace, in the mid-400,000s on an annual basis, he said: "The historic norm is more like 800,000 (single-family unit sales).

Builders are building fewer homes, he said, because they are "responding to demand.

In the quarter ended in June, order growth for most homebuilders averaged just 2.1% year over year, much lower than Wall Street's 4.7% estimate, according to Sterne Agee analyst Jay McCanless in a recent report.

He attributed the miss to lack of credit for first-time buyers and affordability issues for move-up buyers, an opinion echoed by other housing watchers.

"It's a domino effect," said Crowe. "First-time buyers are not active in the market and they usually buy an existing home, which gives an existing-home owner the ability to sell their home and move forward.

Many of those existing-home owners choose new homes the next time around, he says.

"Without the first-time buyer providing a market for the existing home owner, the music stops," he said.

But builders are hopeful. Builder confidence in August for newly built, single-family homes rose two points to 55 in the NAHB/Wells Fargo Housing Market Index, which was released Monday. It was the highest since January.

On Tuesday, the Commerce Department said single-family home starts in July were up 8.3% on a seasonally adjusted basis to an annual rate of 656,000 units. Single-family building permits edged up a slight 0.9% to 640,000 units.

The two reports boosted homebuilder stocks Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), Toll Bros. (TOL) and KB Home (KBH).

"It's not a real surprise," Crowe said of the uptick in single-family home starts. "June numbers were extraordinarily low. I expected the July numbers to make up for that.

While the July numbers "signal a little more strength" in the housing market, added Lindsey Piegza, chief economist at Sterne Agee, "they're coming off significant weakness in the first half of the year.

She added: "I'm skeptical we're going to see any sort of sustained momentum in the second half of the year," blaming lackluster real disposable income growth.

She said income growth of around 2% is just keeping up with inflation "and it's significantly below the rate of home-price appreciation. Jobs we are creating are paying about 20% less than the jobs we lost during the recession. Some people are finding high-paying jobs. But on the whole we're still taking baby steps toward a more robust housing market.

The biggest spike in July numbers was seen in multifamily apartment production, which jumped 28.9% to 437,000 units annually. Multifamily building permits climbed 21.5% to 412,000 units.

The gain in single-family starts comes as investors have backed off from their earlier buying sprees of discounted homes as distressed inventory declined and prices rose.

Research firm CoreLogic reported earlier this month that national home prices in June rose 7.5% from a year earlier and 1% from May. It was the 28th straight month of a yearly gain.

But price gains have been slowing. In May, home prices rose at their slowest pace since February 2013, according to David Blitzer, chairman of the S&P/Case-Shiller Home Price Indices.

Investors haven't been replaced by the usual buyers, namely first timers.

First-time buyers are typically 25 to 34 years old, on the leading edge of the big demographic known as the millennials.

They are the first generation to come of age in the new millennium, ranging in age from their midteens to early 30s.

Work And Debt

Job-age millennials are weighed down by higher unemployment rates than the rest of the population, lower credit scores and student debt.

Though more than 200,000 new jobs have been added to the economy every month since April, the jobs haven't translated into a lot of new home purchases by first-time buyers, housing watchers say.

"We've seen employment growth on the headline number, but the vast majority have been low-wage, part-time or temporary job creation," Piegza said.

Crowe doesn't expect first-time homebuyers to become active in the market "for at least another year.

As for the overall housing recovery, "I think we'll be back to something called normal by 2017," he added.

Owning a home doesn't seem to be a big priority for millennials right now. "Millennials came of age during the housing crisis. So they may not have a favorable attitude toward homebuying," said Molly Boesel, senior economist at CoreLogic.

They're also marrying and having children later, which may partly explain why they are in no hurry to buy a home.

The share of adults in their 20s heading their own households fell after the recession and in 2013 remained 2.6 percentage points below rates 10 years earlier, according to a report from Harvard's Joint Center for Housing Studies.

"This implies that there are 1.1 million fewer heads of households in this key age group," the report noted.

In contrast, when the first wave of the baby-boom generation was of similar age in the 1970s, household growth averaged 1.7 million per year.

Who'll Own A Home?

The U.S. homeownership rate fell last year for the seventh straight year, to 65.1%. By the second quarter of this year, it had dropped to 64.7%, the lowest since the second quarter of 1995.

In a recent survey sponsored by real estate Web company Zillow (Z) and conducted by Pulsenomics, 57% of housing experts queried said they expect the national homeownership rate to be lower in five years than in the first quarter of this year, when it was 64.8%.

More than 60% of those surveyed said they expect rising mortgage rates to have a negative impact on sales. Panelists on average said they expect 30-year fixed rates to reach 5.28% by July 2016. That's still relatively low by historical standards.

Mortgage rates have come down since their full percentage point spike (from a low level) last summer. And they're seen rising some next year as the Fed eases its support of the economy.

Where Credit's Due

Crowe said of what's holding back the housing recovery, "It's not the price of credit. It's the access to credit.

Housing observers generally expect the number of home sales to increase in 2015. Home prices are expected to keep rising, but at a slower rate.

More jobs taken by millennials will eventually provide a boost to home buys, they say. For now they're a boon to another part of the housing market — rental apartments. "This is really the year of the apartment market," said Stephanie McCleskey, vice president of research at Axiometrics, an apartment-market research firm. "We've had the best year-to-date rent growth since the Great Recession and the best occupancy rate since 2000.

Reason? "The main driver now is job growth," she said.

Occupancy rates for rentals nationwide stood at 95% in July, according to Axiometrics. Annualized effective rent growth in July was 3.8%, up from 3.7% in June and 3.4% in July 2013. It is expected to stay above 3% for the full year compared with the historical average of 2.2%.

New apartment supply is coming on from the likes of Arlington, Va.-based Avalon Bay Communities (AVB), Atlanta-based Post Properties (PPS) and Houston-based Camden Property Trust (CPT) .

New supply is not dampening rent growth and occupancy levels, McCleskey says.

"We think new supply is absorbing quite well," she said.

That includes Class A apartments in particular and markets where lots of new units are coming on, she says, such as Seattle, Denver, Houston and Atlanta.

Home prices nationally, meanwhile, are still 13% below their April 2006 peak, according to CoreLogic. Prices in the hardest-hit markets are down much more. Including distressed properties, Florida prices as a whole are 34% off their peak, Nevada 37% and Arizona 29.5%.

But several markets, including Houston, Dallas and Denver, are at peak levels.

Said Pulsenomics founder Terry Loebs in the recent Zillow report: "It's way too soon to conclude that the market has healed and returned to the old normal."