Amid the carnage in the auto sector, economists have sought solace in the comforts of home, sweet home. A recent Census release suggests that Millennials, long sidelined, have finally started to tiptoe into the home-buying market. The reception to the data was so effusive that other reports, suggesting housing has reached a much different sort of turning point, were lost in the fray.
The good news is that the trend is unequivocal, based purely on supply and demand. The bad news is in the actual message. The May University of Michigan Consumer Sentiment survey showed a six-year low among those who think it’s a good time to buy a house and a 12-year high among those who say it’s a good time to sell. Disparities of this breadth tend to coincide with break points and that’s just where we’ve landed in the cycle.
The beginning of May officially marked the advent of a buyers’ market, defined simply as sellers outnumbering buyers by a wide enough margin to trigger falling prices. Yes, it’s the moment buyers have been waiting for. It is also the moment private equity investors, those who’ve crowded out natural buyers, have been dreading.
Three factors determine home sales: interest rates, unemployment and prices. The recent decline in interest rates has provided some semblance of relief; purchase applications have bounced off April’s levels, when they were down four percent over last year. April and May are obviously critical to the spring sales season.
The low unemployment rate would seem to be a huge plus if it wasn’t for the stress building around thousands of layoff announcements across the retail and auto sectors that won’t find their way into this most lagging of economic indicators for months. That is not to say those getting pink slips don’t know their fate, which should influence home sales going forward.
Price is the one bright spot, with one glaring caveat: Falling home prices tend to be associated with a negative macroeconomic backdrop, which does not bode well for any buyer of, well, anything. Dig into the Federal Reserve’s recently released first quarter Senior Loan Officer Survey and you will see nothing of note on the residential mortgage side -- banks reported that both loan demand and lending standards remained unchanged in the first three months of the year.
But that is the here and now. Demand and supply in the auto sector, where pricing has been under pressure for some time, looked quite similar to that for houses several months back.
According to the Fed survey, at minus 13.3 percent, demand for auto loans flat-lined in deeply negative territory, as was the case in last year’s fourth quarter, the worst levels of the current expansion. This data point corroborated the Michigan survey, which showed that those who said it was a good time to buy a car fell to the lowest level since August 2014. Meanwhile, demand for credit card loans slid to minus 10.2 percent from minus 8.3 percent in the last three months of last year. In the event you’re detecting a trend, households are sending out distress signals that have just begun to be picked up in housing, even as household debt levels recapture their pre-crisis highs.
The silver lining in the dynamic that's just beginning to play out is what pricing pressures on the home front imply for the future of household finances -- that is after the recession comes and goes. The cost to rent and buy has never been as high as it is today for the average working young American. The preponderance of apartments constructed in the current cycle has been luxury units. At the same time, private equity investors with deep pockets swooped in and bid up the price of rental homes, leaving many would-be first-time homebuyers and renters alike with no choice but to remain at home with their parents after graduating from college.
A quick glance at the average household budget shows that sky-high housing costs bite more than any other line item. Housing devours a third of average household spending, while auto payments command half that amount. More than any other considerations, these costs matter -- where to sleep at night and the means by which to get to and from work.
Hence the good long-term news building in the coming decline in housing costs as record supplies of apartments coming online collide with falling home prices and private equity investors growing increasingly uncomfortable with their huge inventories of overpriced homes. As for cars, a new report from J.D. Power showed continued deterioration in the auto sector, driven by falling used car prices, sliding car sales and a further rise in incentive spending.
There is budgetary relief building in the pipeline for Millennials. It just might not be in the form they’d prefer to see, nor will it arrive in time to offset the broader macroeconomic damage inflicted by two key areas of support for the U.S. economy.
Perhaps most regrettable is that policy makers inside the Federal Reserve were aware of the pitfalls of being complicit in hampering the clearing of the housing market and providing incentives for subprime car lending. The sad truth is the optics of stifling clearing and encouraging borrowing among those who could ill afford payments was better than the alternative. Again.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of "Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America," and founder of Money Strong LLC.
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