A bounty of housing data was released this week. Housing starts fell in February (though they were still near an unimpressive three year high), permits increased slightly, existing home sales fell, and home builders’ sentiment remained steady. In sum, despite some positive news, the housing market malaise continues. It can’t be called a comeback yet.
At first blush, the cause of the housing malaise seems mystifying. The Pew Research Center says there are more young adults living with their parents than at any time since the 1950s. And our chart of the Case-Shiller Index shows that housing prices have fallen by 34.1% from their peak. Pent up demand for housing is massive and homes are cheaper than they’ve been in almost a decade. So what gives?
The press release of the NAHB/Wells Fargo Housing Market Index may give investors a clue. In the words of NAHB Chief Economist David Crowe, homebuilders “continue to cite obstacles on the road to recovery, including persistently tight builder and buyer credit and the ongoing inventory of distressed properties in some markets.” So basically, although banks are flush with cash they aren’t lending.
Commercial banks haven’t recorded positive year over year growth in real estate lending since September 27 of 2009. Even after the recent uptick in lending, the total is still down from last year. From 1950 until the Great Recession, average year over year growth in real estate lending was 10.5%. Since the Great Recession began, it’s been -3.5%.
Why aren’t banks lending? For one, they can’t make any money doing it. Mortgage rates are at record lows. Our chart of 30 year mortgage rates indicates banks are getting paid only 3.92% to lend. Adjusted for inflation that’s slim pickens’. On top of low rates, delinquencies on single-family residential homes are still near all-time highs. Banks aren’t keen on taking on that kind of risk, especially at such low mortgage rates.
While there has been improvement in the housing market, it hasn’t yet become broad based. Without a broad based improvement in housing, Americans are riding a wave of contrived prosperity.