First-time buyers, a powerful economic energy, create real demand and make the housing market grow. We’ve been praying for their arrival like we’ve been praying for rain in parched California. But the more we pray, the fewer there are.
When a homeowner sells one home and buys another, to upgrade, downgrade, escape an obnoxious neighbor, or whatever, it shows up in the existing home sales figures, and realtors love it because it involves two transactions, the sale of the old home and the purchase of the new home. In both transactions, realtors siphon off commissions, and loan brokers take their fees, and so do banks, and the whole industry around housing is making money off the buyer and the seller. The commissions and fees enter into GDP and trigger tax collections, and so politicians and central bankers are happily claiming credit for their successes. If prices soar, everyone is even happier, and slapping noises from the back-patting become deafening.
But for the housing market, these sales are a zero-sum game. People just swap homes. For the housing market to grow, new buyers need to enter the market. There have been plenty of them over the last two years, in this housing recovery of ours: private equity funds, REITs, and other big investors awash in the Fed’s free money. This is how the Fed has “fixed” the housing market. Small investors too have jumped into the fray. They’re all looking to gobble up vacant homes and rent them out.
The strategy removes these homes from the much scrutinized for-sale or foreclosure inventory and transfers them to the for-rent inventory where they languish unnoticed and unoccupied, often for years. In our housing recovery, that part has been successfully accomplished.
Meanwhile, the real-estate industry can trot out the excuse that sales are crashing – and they are crashing – not only because the weather has been terrible but also because inventories have been low, and there’s nothing to sell.
Yet, purchases by first-time home buyers – the crux of the housing market – dropped to 26% of all purchases in January, down from 27% in December, down from 28% in November, from 30% in January 2013, from the 30-year average of 40%, and from the mid-40% range during good times. It was the lowest percentage of first-time buyers ever recorded.
Conversely, the portion of all-cash buyers rose to 33% in January, up from 32% in December, up from 28% in January last year. Most of them were investors. Individual investors bought 20% of all homes in January, with seven out of ten paying cash. Institutional investors bought a junk too. And foreign investors are piling into the market.
Despite the influx of investors, home sales in January hit a four-year low, according to Redfin, an electronic real-estate broker that covers 19 large metro areas. According to the relentlessly positive National Association of Realtors, existing home sales in January were 6.0% below January 2013, while prices for the median home were up 10.4%. It blamed the weather, though sales dropped 7.3% in the West, in big parts of which the weather has been gorgeous. The report talked about “tight inventories” – now that much of the inventory has been shuffled off to the for-rent lists. And this strategy, despite crashing sales, has goosed prices year over year in the West by 14.6%.
Hence, a fishy aftertaste: the more home sales dropped, the faster prices rose.
These artificially inflated prices are throwing another monkey wrench into the crux of the housing market: first-time buyers. They’re already in trouble because they’re up to their ears in student loans – a debt they’re having trouble dealing with as evidenced by soaring default rates [read…. The Young Subprime Debt-Slave Generation].
A survey released today Redfin found that student loans had kept 16% of its current home-buying clients from buying a home earlier. Of them, 43% had delayed their purchase by three or more years.
But the survey was skewed. Reality is much worse. Redfin sent the survey to “home-buying clients,” including those buying for the first time – so actual first-time buyers. The survey wasn’t sent to the masses of young people who are drowning in student loan debt, and for whom buying a home had moved completely out of reach. Redfin’s survey ignored them. It only focused on the successful ones. And even in that group, 16% admitted that they’d delayed buying a home for years due to the burden of student loans.
But these first-time buyers who have been able to overcome their student loans had gone to school years ago. For recent graduates or future graduates, the scenario looks much worse. In our out-of-whack academic system, public and private universities have become expert at bleeding the student-loan mechanisms by jacking up tuition far beyond the rate of inflation.
For the current academic year, tuition at public 4-year universities jumped 52% above the rate of inflation from ten years ago. With room and board, the average public university is going to cost $18,391 this academic year, the average private non-profit university $40,917. Multiply this by four to get the cost of the education – and what a student might have to borrow. That’s the fate of future first-time buyers; they enter their professional lives, and whatever crummy job prospects they may encounter, with this pile of debt in front of them.