It would have been easy to blame February's continued feeble home sales on the weather, but Realtors seemed more taken with weak affordability and the lack of new households being formed. Sales were down 7.1 percent from a year ago to the slowest pace in 18 months.
So-called household formation is when a person moves out of a home they are living in with others and into a home they live in on their own. They can move into an owned or rented home, but the idea is that they are creating a household where there wasn't one before.
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"Housing is under-performing because the household formation has really stopped growing, which is a mystery in itself," said Lawrence Yun, chief economist for the National Association of Realtors.
There are 34 million more Americans today than in 2000, but household formation has been slow for six years. The year 2000 was also a relatively uninteresting year for home sales, and yet sales today are running lower than in 2000 even though mortgage rates are significantly lower.
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"There are a lot of kids who are shacking up with their families," Federal Reserve Chair Janet Yellen noted in a press conference Wednesday.
That is one reason. Weak affordability and weak job and income growth are others. Home prices have jumped dramatically, largely due to investor interest on the low end of the market and still very low inventory of total homes for sale. Cash is also fueling 35 percent of the market today, according to the Realtors, and that is pushing first-time home buyers out.
Mortgage rates, while historically low, are also hitting affordability. After reaching the lowest level in more than two weeks Monday, rates began to move higher, and they took their biggest jump Wednesday after the Fed's forecasts. The average rate on the 30-year fixed for top-tier borrowers is about 4.5 percent.
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"Keep in mind that 'rates' have a cost component as well, and while rates might not be changing every day, the costs associated with that rate are," noted Matthew Graham, chief operating officer of Mortgage News Daily. "That's important because not only are we up an eighth of a percent in rate so far this week, but based on those costs, we're close to moving up to 4.625 percent. If that happens, it would be a quarter point jump in one week, which is an uncommonly fast move, especially in the context of recent stability."
That answers part of the "mystery" as well. While rates, again, are still historically low, home buyers have short memories. Also, when you add the rising rate environment to the rising home price situation, you get even tougher affordability. On the bright side, perhaps the potential for still higher rates will get some buyers off the fence this spring.
"Once consumers recognize that rates will not be falling, but going up, and the Fed chairwoman has clearly indicated that interest rates will be rising, I think people will be making their home buying decision less on rates but about the credit accessibility or what they're comfortable with financially," Yun said.
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