Housing Recovery Still Faces Choppy Waters

IRVINE, CA-Bullish as recent reports may have been from sources such as Case-Shiller and the National Association of Realtors, a new study from Auction.com Research finds that the US housing recovery faces some choppy waters ahead. Prepared by managing director Peter Muoio, the report notes weaknesses in recent statistics; for example, homeownership actually ticked downward in the second quarter to 65.1% of US households from 65.2% in Q1.

“Mortgages still remain hard to obtain and many consumers have damaged credit ratings and many households remain skittish about purchasing a home,” Muoio writes. And although job growth has been “fairly good,” he adds, wage growth continues to be weak and job gains have slowed in recent months. “Further, the impressive increases in household formations we saw in 2011 and early 2012 have slowed significantly.”

Conversely, however, Muoio observes that sales of existing homes are still at the highest annual rate since the Obama administration offered a federal tax credit to homebuyers in 2009 and 2010, although they've ticked downward in recent months. And affordability remains “unprecedented” in nearly every metro area nationwide, even as mortgage rates inched upward during the quarter.

As multifamily rents continue rising robustly, “the buy-rent equation continues to favor purchasing a home even amid the initial recovery in home prices and recently, the increase in mortgage rates,” writes Muoio. “As a result, the US homeownership rate has yet to hit its trough and start rising.”

Even so, “the tight mortgage market and changed consumer views towards the riskiness, illiquidity and immobility associated with owning versus renting continues to work against homeownership,” he writes. There have been “alternating drops and retrenchment” in homeownership over the past few quarters.

“While this dynamic is likely to continue, we expect that the US homeownership rate is getting closer to its eventual new equilibrium level," Muoio continues. "However, we remain cautious about the housing recovery,” in the face of a slowdown in household formation. It fell to a moving average of 772,000 by the end of Q2, less than half the 1.9-million average seen in June 2012.

“Household formations directly drive housing demand, and as fewer people form new households, demand for housing will suffer,” writes Muoio. Absent organic demand for housing, that places the onus for the recovery on investor purchases. That drives up home prices, “further discouraging would-be homebuyers from forming households and thus purchasing homes.”

It's the interplay of household formations and homeownership, Muoio observes, that ultimately will determine demand for both owned single-family and rental housing. Given the slowdown in household formation between the summer of '12 and the first half of the current year, Auction.com Research is predicting that 2013 will be weaker than last year.

“The outlook for 2014 and beyond is predicated on the economic recovery boosting household formations from their recent subdued pace,” writes Muoio. “If this does not occur, housing demand will be weaker than current consensus estimates.”