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Federal Reserve Chair Janet Yellen feels alright about most of the economy, she told Congress’ Joint Economic Committee yesterday, saying that “many recent indicators suggest a rebound in spending and production is already underway.”
But keep an eye, she advised, on one sector:
“One cautionary note though is that readings on housing activity, a sector that has been recovering since 2011 have remained disappointing so far this year and will bear watching.”
Stephanie Rizk didn’t need to hear it from Ms Yellen though. Two years after the housing market bottomed out, she can see it from the window of her house in Laurel, Maryland.
“On my street there are three abandoned or foreclosed properties that are empty,” she says. “There’s a decaying speedboat in the back yard of one. I can’t do anything about that as a homeowner.”
Rizk put her house up for sale last year because she wanted to move closer to work and school. The house didn’t sell, even after six months on the market.
“It’s really hard to sell a house when there are literally no neighbors because the houses are empty,” she says. Luckily, Rizk found renters. She and her family were able to move...but not buy.
Buying a home new home was a whole other ordeal involving disputes over appraisals and stubborn sellers. “It was very frustrating,” she says.
Chris Mayer, professor of real estate at Columbia School of Business says this is not terribly surprising. “Sales activity of new and existing homes have not recovered anywhere near the levels in a normal recovery,” says Mayer.
Whereas we would expect to see maybe 2 million housing starts a month, says Mayer, we’re seeing less than a million.
Malcolm Hollensteiner, who directs retail lending and sales at TD Bank, says from his vantage point “the concern we have in the industry is that the first time homebuyer has not resurfaced during this recovery.” Rather, “In many markets, 30-40 percent of home buyers are all cash buyers – this means that a high percentage are investors instead of first time homebuyers.”
One reason for this is that Federal Housing Authority has increased the cost of loans for first time home buyers, charging more for mortgage insurance.
“In typical years,” says Hollensteiner, “the FHA share of the first time homebuyer market was as high as 60 or 70 percent -- it’s dropped to the 30 percent range as of today.”
Another, less structural factor behind the current flatness of housing sales compared to last year is that “some sales a year ago were leftover foreclosures,” says Nicholas Retsinas, senior lecturer on real estate at Harvard Business School. “Some is left but a lot went by the wayside,” he says. Additionally, last year there were even more investors buying homes. Now that prices have risen modestly, “investors can’t find that low hanging fruit anymore,” further reducing sales.
The problem for economists including those at the Federal Reserve is that when people don’t buy homes, they don’t buy a lot of other things. “When you buy a home one of the first things you do is go out and get new furniture, talk to contractors, supply companies,” says Columbia’s Mayer. And don’t forget the real estate agents and the lawyers.
In the past, economic recovery depended on this, depended on housing.
Retsinas says “if you go back to the last six or seven recessions, it was the secret sauce.”
No longer, he says. It’s a smaller part of the economy now, and it’s just not recovering quickly.
“It still has some punch, but the punch may not be what it once was.”
If housing isn’t the main driver of the economy, what is? Retsinas says he doesn’t know. Maybe there isn’t just one, or maybe there just isn’t one.