Thursday, January 16, 2020

Housing: Part 359 - Recent shifts in housing may be related to GSE activity

There has been a bit of a mystery recently in housing markets.

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For a couple of years, the square footage of new homes has been declining.  This could be because of a decline in demand for housing, in general.  Or, it could be from a compositional shift to more entry level homes.  That would be bullish.


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Rent inflation remains high, suggesting that demand for shelter remains strong.  Residential investment has levelled off at really low levels.  Rates of homebuilding have levelled off, both in total, and specifically for single family homes.  This suggests that it is a decline in demand (at least for homeownership, if not for shelter) is the cause.  That would point to a retraction in lending markets, or sentiment, or an effect of the progressive housing elements of the 2017 tax law.

There has been a bit of a recent rise in homeownership among young families.  But they are flat among older families.  That calls for some optimism that there is rising demand for entry level homeownership and homebuilding, to meet the existing demand for entry level shelter.  But, the New York Fed's Quarterly Report on Household Debt and Credit doesn't really show any rebound in the number mortgages outstanding or in rising originations among buyers with low FICO scores.  That would suggest that the rebound among young homeowners is limited to those with very good credit.  Yet, if that was the case, why is the average new home size declining?  It could be that young families generally demand smaller homes, even if they are financially secure, because their families are still growing.

I think a clue to what is happening is here, in this AEI update on housing markets.  Here is a slide from AEI.  Notice that at the GSEs, there has been a recent clampdown on high Loan-to-Value and high Debt-to-Income lending.

I suspect that there is a combination of things happening:

1) Some continued tepid improvements in the ability of high-tier buyers to buy or trade-up as equity continues to recover, the economy grows, etc.

2) Still no compositional shift to low tier buyers that have been locked out of the market since 2007.

3) A decline in demand among some subset of those high tier buyers, as a reaction to new tighter standards at the GSEs.  These buyers might be somewhat reducing their demand for units. But the amount they can borrow with conventional loans has been capped by new GSE standards, so they may also be reacting by buying smaller homes.

If this is the case, then I don't think we should be particularly bullish about housing.  I don't think smaller new homes reflect a recovery of low tier borrowing.  But, we also shouldn't be particularly bearish.  The decline in new home size and the levelling off of housing starts may just be a temporary reaction to the change in lending standards to the existing pool of qualified buyers under the current regime.

This might mean that housing will return to a moderate level of growth.  A level of growth that isn't particularly vulnerable to a pullback because there is so much pent up demand for shelter.  And, also a level of growth that could really accelerate with any reasonable expansions in lending standards.  I would call that a bullish expectation in housing, but it's not as bullish as the context where smaller new homes were the result of already expanding the set of potential homebuyers.

PS. This also tweaks my expectations for the broader economy to a more bullish position.  I have posted about how the yield curve is effectively inverted, so that, at least, I expect yields to decline, and possibly some contraction in equity markets or GDP growth.  The pause in housing growth could be a sign of weakening demand, in general.  But, this suggests that it could just be related to a one-time shift in lending standards at the GSEs.

5 comments:

  1. Egads. Due to lending regulations and property zoning, the US is suffocating its housing market and exploding costs for perhaps 100 million Americans.

    But the headlines every day are about US tariffs on a single trading partner, tariffs that might collect $60 billion a year in taxes. By way of comparison, the US will collect $3.6 trillion in taxes in 2020.

    American macroeconomists have become increasingly useless in the sphere of public debate. Some fervently held theologies around inflation and "free trade" confound the entire craft.

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    1. Hi Ben. I think buyers must start to be fearing a bubble. When you buy at these levels you fear being underwater. It may or may not be rational. But it is a cautious approach.

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  2. Interesting.

    https://betterdwelling.com/the-bank-of-canada-officially-began-buying-canadian-mortgage-bonds/

    Gary--- buyers may be running up against affordability also.

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  3. https://www.imf.org/en/Publications/WP/Issues/2020/01/17/Predicting-Downside-Risks-to-House-Prices-and-Macro-Financial-Stability-48932

    IMF says tighten up on lending to homebuyers...oooof

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    1. The thing is, they're not wrong. Imagine the extreme version of macroprudential oversight. In a feudal system, the market value of the lord's property is stable. A system that prevents buyers from entering a market where they are bound to be consumers in any case will push up yields for the remaining owners. Higher yields with steady income surely will lead to more stable prices on the asset.

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