Recent developments in the construction industry suggest the single family housing market may be recovering. Closer examination leaves that in question.
Unemployment in the construction industry dropped from 1,077,000 in April 2013 to 796,000 in April 2014. Since construction’s employment trough in January 2011, it has recovered 568,000 jobs. Despite a sizeable increase in payroll headcount, per-employee wages and salaries in the construction industry increased just 1.3% in the year ending March 2014, and aside from capital and labor, input costs for housing have grown by just 1.1% in the latest year. The costs for new construction seem contained.
Market prices jumped – sales prices increased by 11% during the year ending March 2014, likely reflecting a tilt to upscale homes, because in the same year the total number of new homes sold decreased by 13.3%. It seems evident that potential buyers are price sensitive even though mortgage costs are very affordable compared with rates over the last 30 years. While 40% of buyers prefer new homes, they are resistant to paying a 20% premium for new homes (with newer amenities) versus resale homes (with deferred maintenance).
But the cost components of housing are just part of the story. Fewer families that might need a house are being formed. Household formation has plummeted from a yearly pace of 1.5 million in 2012 to a yearly pace of 197,000 in March 2014. Singles have less need for a house than do families, and for all, there are changing expectations of what home ownership means.
Pre-2006, homes were a sturdy piggybank backing convenient loans for capital-intense projects such as college, a second home, or to start a business. Via a second mortgage, tens of thousands could be borrowed and repaid in a somewhat flexible manner. Since 2006, second mortgages have been more difficult to obtain. Consequently, 401Ks have taken over the piggybank role, albeit with less flexible terms and with the risk of tax penalties.
In many areas of the US, home ownership no longer warrants an assumption that the home can be readily sold, let alone that the equity can be recovered. An unsalable home can prevent the owner from accepting better employment elsewhere.
While price reductions can help induce buyers, at least 10 % of owners are underwater and cannot offer such concessions. And since the traditional assumption that a home will appreciate is unreliable, the capital gain tax exemption may be a questionable inducement to buy a home.
Young potential buyers tend to suffer higher rates of unemployment or underemployment and they are more likely to be paying on a student loan. Those factors can push home ownership out of reach.
Young Americans may recall the 2008 recession and recovery as a calamity or as a bump on their road to success. Experience of their own or their parents or friends will color the lens through which they view financial risk taking, including home buying. For those who see things darkly, home ownership will resonate poorly with their goals.
In many locations, renting makes more financial sense than home ownership. This shift toward renting will weaken political support for the home-sale capital gain tax exemption. Since Washington DC will seize any gambit that can increase tax revenues, the increase in renters may encourage sacrificing the home capital gain tax exemption or the interest deduction. Similar losses are expected in support for homeowner improvements in insulation and for solar generation tax incentives.
While some of the construction labor force may be heading back to work, and some homes may be selling, progress in the housing market is very uneven. Persisting changes in expectations by prospective home buyers may not consider housing as a liquid nest egg, and low price appreciation may negate the benefit of tax exemptions. We can expect more homes to be converted into rentals and some realignment in attitudes toward tax policy. Housing is not ready to bubble anytime soon.
Alan Daley is a retired businessman who writes for the American Consumer Institute Center for Citizen Research