US investors are continuing to excite themselves over the potential for a re-run of the sub-prime housing boom from 2003-7. Thus they welcomed last week’s news of higher house prices with a major rally, after having ignored earlier reports of a slower pace in housing starts themselves. As the chart shows:
• Starts dropped back sharply in April to 850k from 1 million in March
• Key to recent growth has been an increase in multi-unit starts for renting (light blue)
• These are now 33% of total housing starts, compared to 25% historically
Multi-unit homes are generally for rental, and so their increase is part of a major shift in US housing trends. Home ownership in fact peaked back in 2004 at 69% according to Census Bureau data, and is now back at 1996 levels of 65%.
The data does however confirm that the 2008-2012 phase of the house market decline is over:
• The sub-prime collapse from 2008 meant that many buyers with low credit scores lost their homes. They have had to move back into the rental sector, boosting demand there
• Analysts CoreLogic estimate 4.4m homes have suffered foreclosure since September 2008, and that the number in the foreclosure process is now only 1.1m, down 24% versus April 2012
But investors are entirely wrong to assume that everything is back to “normal”. The key factor dominating housing markets today is instead the fact that many homeowners are underwater on their mortgage. Whilst many would like to move, they cannot afford to pay the difference between the current value of their home and the mortgage secured on it. As RealtyTrac note:
“11.3m mortgages nationwide are seriously underwater, meaning the combined amount of mortgages secured by the home was at least 25% more than the estimated value of the home. That represented 26% of all outstanding mortgages.”
The fact that these owners cannot afford to sell is thus temporarily supporting prices in many cities, as potential buyers have only a small number of properties from which to choose. For example, 50% of Nevada’s mortgages are underwater, as are 40% in Florida, and over 30% in Illinois, Ohio, Arizona, Michigan and Georgia.
Optimists may argue that today’s higher prices will enable more people to sell. But they may well also encourage the large investment firms such as Blackstone and Colony Capital (who have spent $bns on buying foreclosed properties for rental) to sell out for a quick profit. And increasing supply will not increase the number of buyers.
Equally, as investor magazine Barron’s notes, 91.6% of all new mortgages are currently being guaranteed by the government, and one third have deposits of less than 5%. As they comment:
“This housing recovery has been so stuffed with government steroids, you wonder if it could make it on its own if these drugs were withdrawn.”