Tight inventories, tight lending standards & crummy wages limit the U.S. housing recovery

The housing market is making a come back from a horrible bust, but it’s far from back to “normal.”  Absentee buyers (mostly investors) purchased 27% of the homes sold here in the San Francisco Bay Area in January, a post-2000 record according to DataQuick (San Diego, California).  And more than a quarter of buyers (29%, compared to a 1988-2012 average of 13%) paid an average (median) $300,000 in cash for their home purchase.

A full recovery in the real estate market is being hampered by low inventories of homes for sale.  Housing starts are rebounding from their historical lows (the chief economist for the Manufacturers Alliance for Productivity and Innovation is forecasting a 25% jump in 2013 starts), but the additional inventory of new homes will not come on stream until late 2013 and 2014, just in time for a slowing economy.  Tight lending standards (see the table below) may also be limiting a rebound in home sales.

Fed Lending Survey Jan 2013Rising housing starts and existing home sales will spur construction activity and new orders for durable goods  (appliances, carpets, furniture and furnishings), but the rebound normally experienced in a recovering economy may not occur in 2013.  Demand for housing is bouncing back from a historical low, but low and falling earnings of young adults is lowering household formation rates.  And those forming new households are increasingly choosing to rent.  In addition, first time home buyers with just 20% down find it difficult to compete with the increasing number of all cash buyers.

Low inventories of homes for sale, slow to no income growth for young Americans, young adults opting to rent instead of buy, and tight lending standards all point to a slow growing housing market.  The rebound will definitely be less vibrant than usual during an economic recovery.  By 2015, we’ll see whether the low level of activity is a new normal, or a temporary lull before a full housing (and economic) recovery.

Anne Ramstetter Wenzel is a Menlo Park, California, based economist and author of The Entrepreneur’s Guide to Market Research.

About Anne Ramstetter Wenzel

Economist & Market Researcher, Certified Business Advisor for the Silicon Valley Small Business Development Center.
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