We are deep into the best market for home sales in nearly a decade and the latest hard data shows that it is just as difficult to qualify for a purchase mortgage in July as it was last March–or even in March 2012.Since the crisis, all-cash buyers, institutional buyers, and investors have pulled up some of the slack in home buying from households who have been pushed out of the credit market. I think some of the headwinds in housing recovery and the continued excess returns to homeownership are due to organizational limits to how quickly those buyers can expand over large portions of a market that has always been dominated by owner-occupiers.
I have been waiting to see a recovery in mortgage credit markets as a signal that owner-occupiers might begin to return to the market. There have been faint rays of hope, but generally this proposition has not yet come to pass. There were signs late last year that regulatory constraints on conventional mortgage standards might loosen. But, as the article suggests, this just may not be in the cards. So, I think we will need to see some sort of substitution within the mortgage credit market.
This is why I would have hoped to see more expansion in closed-end real estate loans retained by the banks. But, this has been disappointing. There appears to be a burgeoning rent-to-own market, and new single family homes built for renting. But, I think we also need to see growth in non-bank mortgage lending. Private securitization markets will probably face many of the same headwinds as conventional securitization markets, so it looks like what needs to develop is non-bank, retained asset mortgage industry. As with rented single family residence housing, this currently represents a small segment of the market, so, as with all of these residential real estate trends, it looks like there are organizational limits to the amount of growth that is possible in the short term, if it isn't going to come from traditional sources. In this first graph, we can see that Ginnie Mae loan levels, after many years of stagnation, are the only source of mortgages that has grown since the crisis began, capturing back some of the low down payment market that had been moving into private pools. All other mortgage holder groups have declined. So, at least as of 1Q 2015, there had not been a resurgence of mortgage growth outside of federal agencies and banks.
I think residential construction spending was inflated in the 2000s, in part, because of the supply constrictions in the major cities, so that we were substituting billions of dollars of lumber and gypsum board in the exurbs for billions of dollars of valuable locations in the air above residential neighborhoods of our high density development-phobic cities. This caused home sizes and construction spending to increase and productivity to decrease, relative to the alternative. But, in any case, as with most indicators of residential investment, this appears to show a boom in residential construction in the 2000s followed by a larger bust in the 2010s.
But, was it a bubble, fueled by subprime mortgages and federal home ownership policies, that pushed home prices into unsustainable territory?
CoStar publishes indexes for Commercial Real Estate similar to the Case-Shiller Indexes for Residential Real Estate. Here, I have graphed two CoStar indexes: Multi-Family Residential Housing and non-residential construction. And I have compared them to the Case-Shiller National Home Price Index. All are indexed to 100 at December 2000.
In terms of prices there is very little difference between the Case-Shiller index for single family homes and the CoStar index for multi-family properties. And non-residential (retail, industrial, and office) prices follow fairly closely, generally rising and peaking about a year after residential prices, but peaking at the same level as residential prices, relative to prices in the 1990s.
After the crisis, single family home prices look like they were probably boosted by temporary homebuyer support programs in 2009 and 2010. Multi-family and non-residential real estate bottomed in 2010 and have been rising by low double digits annually since then. In the aggregate, both types of real estate are above pre-crisis price levels - multi-family real estate is much higher. Meanwhile, single family home price increases are moderate.
|Source : accuracy of real rate, from most to least is: green, red, purple.|
Non-residential real estate has continued to rise, reflecting low real interest rates and general inflation over time. Multi-family residential real estate prices are probably rising even faster than non-residential prices because the decade-long supply depression has created significant rent inflation and expected future rent inflation, and the foreclosure crisis pushed many families into rental housing, pushing up rents. Also, multi-family housing, as a class, is especially exposed to the high rents from the dysfunctional cities. Rents on single family homes are rising, too, but the difference is that multi-family housing owners have access to credit outside the single-family mortgage market. So, those properties can be bid up to their reasonable market prices.
Single family homes may need to appreciate another 30% to trigger the complex set of market reactions that will lead to the robust new building that we desperately need. Commercial real estate prices have risen that much more already because developers can usually charge market rents on commercial real estate in the big cities (Who is going to complain that rents on corporate offices are too high?), nobody frets about affordability indexes for corporations, and nobody demands that we fine or jail bankers for making "predatory" loans to commercial borrowers. Single family homes face all of these obstacles. In modern America, maybe the best you can hope for is that populists hate you enough that they stop coming up with imaginary problems that they have to fix for you.