This week on The Construction Cut, Taylor dives into why housing affordability is contributing to a lack of housing inventory, and what that means for the average home builder. Household debt, the re-introduction of "non prime" mortgages, and the Coronavirus are also discussed. Listen to the entire episode below on Soundcloud.
- Household Debt has increased to a record 14 trillion dollars
- Lack of housing affordability is driving mortgage rates down to record setting levels
- The housing industry is beginning to re-introduce risky mortgages back into the market
- How will the rapid spread of the Coronavirus affect the luxury housing market here in the US?
Listen to the entire episode below on SoundCloud.
Full Episode Transcription
Welcome back to The Construction Cut. This week we’re diving into household debt and what it means for the housing market and our economy. I’m also diving into the adverse effects that the Coronavirus may have on the luxury home market. There is a lot to get into this week- so let’s get started.
It’s Monday, February 17th, 2020. Let’s dive in:
US household debt has increased to a record 14 trillion dollars. According to data released by the Federal Reserve, consumer debt- student loans, auto loans, personal loans, and credit cards- increased 4.4% in Q4 last year. Americans added an extra 600 billion debt to the pile in 2019 alone. It’s also worth noting here that this 14 trillion figure does not include debts on mortgages. In that same period of time, mortgage-related debt rose 120 billion to 9.56 trillion dollars- and the housing market is to blame. Mortgage rates have fallen by 100 points over the last year, adding more and more purchasing power to the average consumer.
The Federal Reserve is painting a pretty bleak picture here. While the stock market continues to show strong growth and unemployment remains at a record post-recession low, there is no doubt that there is an impending consumer debt crisis in America. Along with an unprecedented surge in student loan debt- it’s credit card debt and auto loan debt that worry economists the most, although there does seem to be a bubble brewing as it relates to the housing industry. I see a lot of information, a lot of articles that tout the stability of the market. I’ve even reported on the data in the last several weeks of doing this podcast- but I’m afraid there are deeper concerns here than what we’re being led to believe.
There are two issues here that I’m going to focus on- housing affordability, and the reintroduction of risky mortgages. Let’s start with affordability.
Although mortgage rates are at an all-time low- there is an inventory problem. The lack of inventory has created an affordability issue. It’s not even an issue really, it's a crisis. The inventory of available homes has dropped to its lowest point since 2012- and the lack of inventory is driving up prices exponentially. Existing home prices have risen 5.4% from the previous year- and have risen in an astonishing 93% of markets in the United States, creating a massive vacuum. But here’s an incredible statistic for you-remember last week when I said home equity is surging- the average home in the United States has seen its value rise 42% in the previous six years. This is according to Zillow. So, since 2013- the average home value rose 42%, ok, great news for existing homeowners… but the average wage increased by only 17%. So how can this crisis of affordability impact the housing market? Well, for starters- low mortgage rates don’t help potential buyers if they cannot afford to buy a home in their area. Just because mortgages are low, doesn’t mean people will take out loans for houses they simply can’t afford. So with a smaller pool of Americans submitting applications- banks could start to loosen their application criteria- which, as we all know, is a terrible, terrible path to walk on. If you’d like to learn more about the topic of affordability- there is an excellent article from Barrons that explains this development in further detail- it’s worth reading. I’ll go ahead and link it on the show notes over on the Builder Funnel website.
So along with affordability- we have also seen a rise in risky mortgages. According to an article in the Washington Post, “the federal government has dramatically expanded its exposure to risky mortgages, as federal officials over the past four years took steps that cleared the way for companies to issue loans that many borrowers might not be able to repay. Now, Fannie Mae, Freddie Mac, and the Federal Housing Administration guarantee almost $7 trillion in mortgage-related debt, 33 percent more than before the housing crisis, according to company and government data. Because these entities are run or backstopped by the US government, a large increase in loan defaults could cost taxpayers hundreds of billions of dollars.”
While the financial crises led to a justified outcry from American’s, the preference of “non-prime” lenders (a not so secret moniker for subprime loans) is stronger than ever. Couple this with the rise of “jumbo loans” loans that exceed the guarantees set by Fannie Mae and Freddie Mac-- and you’ve got a bubble brewing. I don’t want to scare anyone here- but it’s worth mentioning. I’ll keep an eye on our nation’s debt as the year goes on- and we’ll see where it goes as we get further along into 2020.
Let’s move on to something equally as uplifting — the dangerous spread of the Corona Virus. As I’m sure most of you are aware by now, the Corona Virus is spreading rapidly. As of today, I’m writing this on Friday, February 14th, there are over 63,000 confirmed cases of the deadly disease. While there are only 15 confirmed cases here in the United States, the effects of this global event are already starting to take hold in the media.
Many news outlets have reported that it will have an adverse effect on global financial markets. Specifically, in the United States, the spread of the virus is expected to have a negative effect on the luxury housing market. Why is this? Well, in the last several years, the luxury housing market has been propped up by an influx of Chinese buyers. According to Redfin’s Chief Economist, “demand for luxury is improving. That’s showing up primarily in an increase in sales right now, but it’s also putting some slight upward pressure on prices.” In Q4 of last year, the average sale price for luxury homes increased to $1.63 million.
According to NAR, buyer’s from China spent $13.4 billion on homes here in the US from April 2018 to May 2019. Often second or third homes in expensive markets like New York and San Francisco, these homes account for a significant portion of the luxury market. Since most flights between China and the US have stalled- prospective home buyers simply can’t enter the US. That, combined with escalating trade disputes between the two countries, could lead to softer numbers in 2020.
The Corona Virus could also result in lower mortgage rates here in the US. The reason being- China is the world’s second-largest economy, second only to the United States. When a significant event upends their economy- it’s felt by markets across the globe. Investors get nervous- pulling their money out of the stock market and into treasury bonds. Stronger bonds equal lower mortgage rates. There you go. I could have been an economist. Thanks to Clare Trapasso at Realtor.com for breaking this down for us who are not, in fact, economists. Next week I’m going to touch on a few more stories in the news that may send mortgage rates even lower in 2020.
Let’s end with some good news for the remodeling industry. A new report from the Home Improvement Research Institute (HIRI) is suggesting that homeowner attitudes when it comes to remodeling- are incredibly positive. According to their 2019 Project Decision Study, homeowners are more and more positive about the actual remodeling process. Something the report also suggests is something that we at Builder Funnel already know- that the average length of time between the “birth of an idea” and the execution of that idea is typically six or seven months. But here’s something important for you remodelers out there- according to this report- 90% of all consumers research online ahead of time before signing a contract. Out of that, 90 %, 40% remarked that online research is incredibly important to their overall decision-making process and that “an appealing, sharp digital presence is highly important.” The report also suggests that some of these folks are also doing thorough research online to determine whether or not they can handle their project themselves — something to think about.
Thanks for spending some time with me this week. If you haven’t already- make sure you sign up for The Construction Cut newsletter. It’s a weekly newsletter that’s going to hit your inbox with everything you need you need to know about what’s going on in the construction industry. See you guys next week.