The 50 Altered States of American Housing
Oh the horror! Movies that is. Its summertime and once again they’re out there, all those shriek-worthy trailers just waiting to pounce. They’ll grab you by the psyche and parade just for you and your mind’s viewing pleasure an all-inclusive review of your horror genre past. And if you happen to have been born squeamish and came of age in the ‘80s, you know it only took sitting through a handful of scream inducers before you gave up the fight and relinquished the field. A little Halloween here, a dash of Friday the 13th there with some Freddy K thrown in for good measure and yours truly duly checked out for life.
Sadly, swearing off the blood and gore didn’t do the trick. It was there, just waiting, a whole new dimension of mental anguish. Altered States was its name, the psychological was its game and late night channel surfing its domain. While it’s true the film was a cinematographic groundbreaker, it’s also true that scenes such as those featuring hideously hallucinogenic ever-narrowing hallways were enough to make one wish British filmmaker Ken Russell hadn’t been so desperate for work in the late 1970s. Russell was the 27th director Warner Brothers approached when the 26th, Arthur Penn, abandoned the project after a failed six-month stab at success.
As the New York Times review said at the time, “Russell, using special effects…combines electronic music, video imagery and all manner of visionary artifacts in a fast, ear-splitting, spectacular array.” All those special effects might be fascinating for some, but, if one “ahem” should need a certain amount of uncluttered mental space to maintain one’s wellbeing, combining the above with hellishly narrow hallways certainly lingers to unnerve an unsuspecting subconscious.
Lucky for us, we live in an airy, not scary, new world of wide open floor-plans. We live in the 21st Century of big houses as far as the eye can see. Consider if you will that in the late 1970s, when Russell first set foot on the Altered States movie set, the median home in America was just over 1,500 square feet. Stretch your leg room and fast forward to today – the median home size has grown to 2,500 square feet and the living space of the average occupant has doubled.
If anything, this impetus to expand has accelerated since 2010. After a brief reprieve in the immediate aftermath of the onset of the housing crisis, the pace of growth in home sizes has actually picked up. In the event this makes absolutely no sense vis-à-vis what you’ve been reading in the papers about millennials’ financial wherewithal, rest assured, there is a perfectly rational explanation.
It all comes down to economics, though not of the kind associated with the dismal science variety. Economics in this case refers to the economics of the deal, as in making the math work so there is a profit in the end. This has proven to be no easy feat against backdrop of stagnate median incomes and near-zero interest rates, which are but two of the factors at work against housing in recent years.
The Wall Street Journal reported that fees on everything from the cost to service roads, sewers, and parks to environmental quality standards and the required number of bricks on a home’s exterior have risen appreciably in recent years. Add it all up and the cost to comply with regulations has leaped by 29.8 percent over the past five years. That’s helped catapult the growth of the median price of a new home to roughly a third over the growth of existing home prices.
In the adding-insult-to-injury department, at least from the perspective of a potential first time home buyer, builders have done the math and determined that the real money to be made is in larger, more luxurious homes. Are builders wrong-headed in their actions? The short answer is no if they intend to stay in business.
For validation of their logic, look no further than the latest new home sales figures, which beat the forecast by a mile: consensus was calling for sales to come in at annualized rate of 562,000; instead they clocked in at a 592,000 rate, the highest in over eight years though still shy of the 25-year average of 715,000. But here’s the catch – the lift came from homes priced north of $400,000. Homes priced below that point fell over the past month.
As of June, the median new home price was north of $300,000, up 6.1 percent over last year. Is it any wonder plans to buy a home are hovering near their lowest level in a year?
“I think we can let go of the idea that if builders build more homes, then somehow homes overall will be more affordable,” wrote housing guru Logan Mohtashami in his latest missive. “We have a permanent housing inflation problem that started four decades ago and will not be easily cured by dithering with the inventory of larger homes.”
At least, and this is a stretch, housing inflation is not quite as hot in the resale market where price appreciation has slowed to 5.2 percent over last year, the slowest pace in eight months. Perhaps this slight cooling can be explained by the relative resurgence in first-time homebuyers. At 33 percent, the June data revealed that first time homebuyers had the healthiest showing since mid-2012.
The question is where does the market go from here? Bank of America’s Michelle Meyer and her crack team of housing analysts recently endeavored to answer that very question.
“Looking ahead, a strong labor market and rising incomes should support the renter-to-homebuyer transition,” the report started off optimistically. Then the however arrived in the form of, “though tight credit conditions remain a challenge.”
Wait a minute. Haven’t we been reading for months about the renaissance in mortgage lending tied to a relaxation of standards? It is certainly the case that larger credit unions have been underwriting mortgages at a fair clip. And there’s plenty of proposed legislation out there to ease the regulatory burden.
For now, at least according to the Mortgage Bankers Association’s Credit Availability Index (MCIA), it’s become increasingly difficult to qualify for a mortgage despite mortgage rates being just above their lows for this cycle. As of June, the MCIA was at its lowest level since February 2015; it’s been sliding for eight months now. At the same time, the difference between jumbo (for homes priced above $417,000) and conventional mortgage rates is the widest since March 2011.
“This shows that despite falling interest rates, there is a heightened sense of risk aversion in the market,” concluded BofA’s team.
Where does that leave potential homebuyers?
One answer to this question is, “at home,” as in the home they grew up in. A recent analysis by the Pew Research Center found that for the first time in 130 years, Americans between the ages of 18-34 are more likely to be living with their parents compared to any other living arrangement. Some 32.1 percent are bunked up with their parents while 31.6 percent live with a spouse or significant other; only 14 percent live alone.
The sunny side of the story first. The stigma of living at home has worn off. It’s just economically easier to get that law degree or MBA while living at home. And then there’s always mom’s cooking (if she’s a good cook, that is.)
The less bright reason is also culturally-driven. It’s no secret that many millennials are drawn to big cities. The problem, as per a recent Zillow study, is that lower income earners would need to fork over 30 percent or more of their monthly income to make a mortgage payment in one third of major housing markets. The brighter the lights and bigger the city, the more you would spend leaving less for every other expense. So you live with your folks… if that’s an option.
The truth is, in recent years, millions who can’t afford to buy a home have been forced into the rental pool where inflation has also been unbridled. Typically, the rental inflation captured in the consumer price index is too kind, tracking at unrealistically low levels; for the record, it’s risen by 3.8 percent over the last year.
Clearly we’ve crossed the Rubicon to atypical. Today, the market inflation rate captured by private firms is running below that of the CPI; it’s at 3.5 percent over the last year as oversupply finally collides with unaffordability. That’s bound to be welcome news as rent inflation has been running closer to five percent since 2014.
The culprit in the apartment arena may have a familiar ring to it. Last year, three out of every four apartments constructed were for the luxury sector, continuing a trend that’s been firmly in place since 2012. Making matters worse, realistic and mutually beneficial public/private partnerships have also dried up in recent years, yet another reflection of the gridlocked economic potential trapped inside the Beltway.
It’s easy enough to say that something has to give. For the moment, it appears as if that something is apartment rental rates, a welcome development. Over the longer haul, though, even the millennials have to settle down and have 2.4 kids and get a dog who enjoys a backyard in a home they own.
We can only hope Mohtashami is wrong though his reasoning is sound: “I call it the ‘Tiffany Effect.’ Just like most couples cannot afford an engagement ring that comes in that distinctive blue box, only the very fortunate few will be able to afford a new home.”
Of course the hope is that household formation kicks up to two million a year or more from here on out as the sheer number of millennials entering their prime earning years simply forces up the ranks of first-time homebuyers.
“The massive demographic push that will come in years 2020-2024 will increase housing demand,” concedes Mohtashami. “But it won’t be as strong as some of my bullish friends in the housing community are betting on.”
What a beginning to the century it’s been for housing. It started with low interest rates fueling unfathomable home price appreciation. Sixteen years later, it’s an Altered State of being with low interest rates driving rampant rental inflation, even as median incomes remain 1.5-percent below their 2000 levels.
On whose watch was this fright show produced? Who wrote the script being played out in all its gory detail across all 50 states of the residential real estate map?
Meddling in markets never ends well. Though much hope is pinned on housing being the exception to this rule, the odds are stacked against a miracle outcome. They say power corrupts absolutely. After nearly 30 years, one can only hope the lesson has also been learned that lower for longer also distorts indefinitely.
Originally posted on Danielle DiMartino Booth’s website.
Become An Insider!
Sign up for Affluent Investor's free email newsletter and receive Jerry Bowyer's Special Report, "How to Be an Affluent Investor in the Age of Obama & Ineffectual Republican Opposition."