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US House Prices Cool Off After Dizzy Ten Year Ride – Analysis

Homes

By Nikhila Natarajan

We’ve seen this movie before.

Next time you crane your neck up as you emerge from the subterranean train tunnels at Grand Central Station into the neon lights of New York City, you just might be looking up at a vacant apartment.

Nearly 5,300 apartments in Manhattan are listed for resale end of September 2016. Buyers are playing a waiting game, sellers want to cash out.

Year on year apartment sales in Manhattan are down 20 percent for September.

This trend is not limited to New York City, though.

A three bedroom single family home in Springfield, New Jersey is up for sale at $700,000 and lying vacant for five months; a three bed, three bath plus basement townhome in a Columbia MD cul de sac in one of America’s best school districts was advertised for $450,000 and sold for $400,000 this summer.

Since the Great Recession officially hit in 2008, house ownership in America has fallen from sixty nine percent to sixty three percent according to latest data.

Although that is still more than six in ten people on average who own a home, it’s being portrayed as a shame by politicians on the right — Trump and his minions.

House ownership is an idea that gets Americans dreamy eyed — a national love affair that runs deep.

Exactly ten years after the first cracks appeared in what would become the great crash of 2008, prices are cooling off in America’s housing markets that were red hot for five years on the trot.

The five-year surge in real estate demand across the West is starting to take its toll in some areas as buyers become more reluctant to purchase a home that would eat up a large chunk of their monthly earnings. With job growth still robust, house hunters are pushing outward from city centres to get more for their money.

Rents are falling too. Just as Uber is making people put off the car-buy decision, lower rents and higher supply of apartments are making more people wait out the home buying decision. But there are exceptions, especially on America’s west coast. Millennials are drawn to cities such as Seattle and San Francisco because of job opportunities and high pay and where limited rental supply is driving up costs.

Potential buyers are getting put off by sticker shock of unrealistic down payments.

In this election year, the closest either Clinton or Trump came to discussing the risk of another collapse is jabs during the debate. Clinton accused Trump of playing a falling market, arguing that he “rooted for the housing collapse.” Trump said, “it’s called business,” and then the talk moved on to Miss Universe, grope tapes and all that had to do with the two candidates and little to do with the 324 million people who will vote or buy houses.

Cheap debt and the decades old packaging of home ownership as a wealth accumulation tool (never mind the debt) in American culture mean that housing crises are a routine blot in America’s economy.

On the face of it, America’s housing market has been taped up, but scholars say the same risks that sparked the giant crash remain.

America’s banks have cleaned up their act, their core capital is now at $1.2 trillion, which does not include funky market instruments but just solid equity. Market intelligence has it that the share of households with mortgage debts greater than the value of their property has dropped.

But the way America does home loan business has not changed. In other countries, banks lend money to home buyers and deal with them bilaterally. In America, every home loan is bundled into a bond, guaranteed by the government and sold to buyers worldwide.

The mechanics are far more complicated, but it’s not far off the mark to say that a New Yorker’s thirty year mortgage may well be a bond held by a Chinese investor living on the other side of the planet.

At least $7 trillion of America’s housing market — the world’s largest asset class — is held exactly like this in the hands of investors worldwide.

On the regulatory side, while banks has tightened processes, the fizz is slowly going out for home sellers. After years of nonstop price spiral, buyers are getting price fatigue.

In the past five years, home values have soared seventy one percent in Denver, sixty six percent in San Francisco and fifty four percent in Austin, Zillow data show. Nationwide, the gain was twenty two percent.

Western cities — especially San Francisco, San Diego, Los Angeles and others like Austin, Texas — which led America out of the Great Recession with a job boom mainly in technology are showing signs of cool off.

The same study says buying a roughly 700 square-foot apartment is out of reach for most ‘highly skilled’ people earning an ‘average’ annual income.

Surplus high end units in ritzy neighbourhoods and slower growth in high income jobs mean that home prices that are at the tippy top like they were in 2006 than they’ve ever been may get no takers for months — pushing prices down.

Almost 200,000 units have come into the rental market in America in the past twelve months and 2016 will set records for construction figures or break them.

Lenders are getting more selective about the projects they fund.

In a line, if you’re putting money into a house in America, bargain hard and rent while you wait it out. In both cases, you’ll be better off than you’ve been in the last five years.

Prices may fall back to earth.

   Latest home sales statistics [Census Bureau data]
  August 2016 new home sales fell 7.6 percent from July to 609,000 units.
  New home sales fell in the Northeast, Midwest and South, but increased in the West.
  The median seasonally adjusted price of new homes sold in August was $285,600, the lowest since September 2014.

About the Author

Observer Research Foundation
Observer Research Foundation
ORF was established on 5 September 1990 as a private, not for profit, ’think tank’ to influence public policy formulation. The Foundation brought together, for the first time, leading Indian economists and policymakers to present An Agenda for Economic Reforms in India. The idea was to help develop a consensus in favour of economic reforms.

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