Followers of the housing market got spooked a couple weeks ago
by some data suggesting the market was in trouble. First, the
recent pending home sales data from the National Association of
Realtors showed a 1.1% decline, when economists had forecast a
0.5% increase. Second, the S&P Case-Shiller 20-city
house price index declined 0.3% on a monthly basis, when
economists had predicted a 0.4% increase. Is it game over for the
U.S. housing market?
U.S. housing affordability and homeowner vacancy
There's no doubt that the housing market has slowed from the
strong growth it saw in 2013, but that doesn't mean it's about to
crash. On the contrary, there are four key reasons the market is
likely to improve.
First, despite the talk that rising mortgage rates will choke
off demand, housing still remains relatively affordable. Take a
look at the National Association of Home Builders/
housing opportunity index -- the higher the number, the more
affordable housing is.
Source: NAHB/Wells Fargo.
Affordability fell in the second half of 2013, but on a
historical basis, it's still supportive of good growth in the
housing market. Readers can see that, according to the index,
housing is more affordable than it was for most of the 1992-2009
Second, homeowner and rental vacancy rates suggest that the
number of houses and rentals available is shrinking. Vacancy
rates simply refer to the percentage of properties which are
unoccupied. A look at the data from the U.S. Census Bureau
demonstrates that rental vacancy rates are falling sharply,
while homeowner vacancy rates remain low. The lower the number,
the fewer properties there are available to rent or buy.
Source: U.S. Census Bureau.
Low vacancy rates imply a housing market where fewer
properties are available for rent or sale. In other words, a
market where renters and buyers may be pressured to pay more to
rent or buy a property. If vacancy rates keep falling, housing
demand will surely strengthen.
Towards a sustainable housing market recovery?
Third, it's obvious that rising mortgage rates have affected
affordability, and it's likely that they've negatively affected
the ability of some mortgage holders to keep up with payments.
However, one of the key things for a sustainable recovery is that
the banks don't suffer loan losses from failing mortgages. The
bad news is that, in response to rising mortgage rates, banks
have tightened their lending standards, making it harder for
people to get mortgages.
Data from the Federal Reserve Senior Loan Officer Survey shows
how demand for prime mortgage loans -- mortgages given to the
most credit-worthy borrowers -- has weakened in 2014, while
lending standards have tightened as banks protect their balance
sheets by being more careful with issuing mortgages -- not good
for the housing market in general.
Source: Federal Reserve.
The short-term effect is likely to be negative, but the
important thing for a sustainable recovery is that the banks
remain in a position to lend as employment continues to recover.
Indeed, a recent article in the
discussed how the six biggest U.S. banks "collectively
reported credit losses equal to 0.6 percent of total loans, down
from a credit crisis high of 3.3 percent."
In a sense, it's better for the housing market to experience a
slower rate of growth from time to time. The reason being that
nobody wants the banks to get into a 2008-type of scenario where
a period of runaway growth would encourage them to issue a lot of
debt that would turn bad. The usual outcome of which is that
banks stop lending altogether. Arguably, it's better to have a
slow period of growth, in order to make sure that the recovery
lasts longer. According to the
, the good news is that the banks are in good shape to
Fourth, there is strong anecdotal evidence to suggest that the
underlying dynamics remain positive. For example, home goods
stores such as
remained upbeat on housing
Where next for home prices and the housing market?
The banks' tightening of lending standards -- making it harder
for individuals to get mortgages -- is an obvious setback, but it
could prove to be a short-term event, provided the economy
continues to recover. Housing affordability remains supportive of
an increase in house pricing, and vacancy rates suggest that
underlying demand remains in place for a recovery.
Ultimately, the conditions are set for long-term growth, even
if the market has weakened in 2014. Investors should look for
banks to start loosening lending standards as the market recovers
from a slow period of growth caused by the initial increase in
As long as employment gains remain assured, and mortgage rates
don't rise too much higher, it's not a good idea to bet against
the housing market.
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Weak Home Sales, Falling House Prices: Game Over
for the U.S. Housing Market?
originally appeared on Fool.com.
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