Real Estate Catch-22: Rising Rents Are Hurting Home Sales

By Harry Dent, Economy & Markets Daily:

This is what’s not happening in the housing market: young people buying homes — even though there are falling mortgage costs and rising rents.

Those rising rents make it harder for young families to save for a down payment on a home. Add in high student loan debts for many of them and less certain job prospects for younger people, who are experiencing much higher unemployment rates than the older baby boom generation, and the problem becomes very real. And inflation-adjusted incomes have been falling since 2000.

This chart shows clear trends in opposite directions. Rents have been rising as a percentage of incomes while mortgage costs have been falling.

Image For Housing Market: Kids Sold Separately

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Rents in the pre-bubble years of 1985 — 1999 averaged 24.9% of the renter’s income. That average has now risen to 29.5%.

It makes sense to think that rents would fall after home prices fell, but they didn’t due to rising demand vs. supply. This is why so many individuals and investment funds have been scooping up small homes and renting them out.

The big question here is how long can this go on without creating an oversupply of rental homes? It clearly doesn’t appear that this has occurred yet or rents would be falling. If we’re right about a deeper recession and depression just around the corner, it will lead to downward pressure on both rents and home prices.

The cost of mortgages as a percent of income has fallen from pre-bubble levels of 22.1% to just 15.3%. This is obviously due to the falling mortgage rates, but that’s an artificial and free gift from the Fed.

During the housing bubble’s 6-year run (2000 to 2005), mortgage costs rose from 18% to 25%. That’s why bubbles aren’t sustainable.

If you are wondering how renting could be so much more expensive than mortgage costs, part of the reason is that the average income of renters is much lower: $31,888 vs. $65,514 for homeowners. Rent reduces their already meager income by a higher percentage.

Ordinarily this would have caused a massive increase on home buying. In Chapter 3 of The Demographic Cliff, I explain why the housing market will never be the same in this post-bubble era. We’re approaching the point when there will be more sellers from the aging of the massive baby boom generation than younger buyers from the millennial generation that peak between age 37 and 41.

The numbers are similar to workforce growth where I subtract retirees from new tenants. For housing, I subtract the sellers at age 79 from the peak buyers at age 41 and then I can calculate “net” demand for housing for decades into the future.

Net demand has been falling since 2000, despite a slight bounce up in 2014. That small spike was almost in line with the slight rebound home prices had in 2012. Once we slide into 2015, it will fall again and hit negative net demand from 2029 to 2039. Once there are literally more sellers than buyers, we won’t need any new homes built!

Housing should slow from 2015 forward — and economists are more confident than ever that we are in a sustainable recovery. The most affluent households also peak this year and will go off the “demographic cliff” like the average household did after 2007.

The truth is that the Fed is tapering at precisely the wrong time and I wrote about it this past July in “Their Economy Will Collapse, Including Ours.”

Once I describe a fall in real estate worse than the one that happened during the years of 1925-1933, I find it quite easy to talk younger households out of buying a home. But it is still proving difficult for me to talk older households out of buying a house.

Principle #5 of bubbles (page 146, The Demographic Cliff) states: “Bubbles tend to go back to where they started or a bit lower.”

Real estate prices will fall at least 40% from where they are now.

Don’t even think about buying a home (or worse an office) until at least early 2017. Let the coming stock crash and depression see its first and likely worst phase. We’ll advise you further at that point. By Harry Dent, Economy & Markets Daily

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  5 comments for “Real Estate Catch-22: Rising Rents Are Hurting Home Sales

  1. Louis says:

    I’ll buy the argument that increasing rents are making it hard to save enough to get a mortgage. Considering the rising housing prices in many parts of the country, I’m a bit unclear as to how mortgage costs can be decreasing—fewer people seem to qualify and those that do can find themselves competing against all-cash buyers.

  2. daniel says:

    How can the prices of real estate be falling if the inflation is coming and in addition to that the world population, and the population of the US in particular in growing fast? Very soon the demand will be there and the housing market will sky rocket.

    • Louis says:

      The United States housing market already is skyrocketing, in many parts of the country, to levels which are not sustainable–the demand is being driven largely by investors not people who are actually looking for a place to live.

  3. Petunia says:

    Overall I think the trend for house prices will be down for decades. This is turning into something more cultural than the financial community realizes. Home ownership was not just about the numbers for the average family. They invested more in their homes than they ever got back. Home ownership represented their stake in America. Because Wall St. turned home ownership into a numbers game, Americans have been forced to look at the numbers and they don’t add up and never will. So, let the eat houses.

  4. David says:

    When you add in student debt then first time buyers are already carrying far too much debt already. This is impairing their ability to save for a deposit. Add in high rents and the inability to get a mortgage, and the numbers of first time buyers will shrink. So the long term prognosis for housing is very poor, especially when 56% of the population are sub prime now. Without new household formation the associated sales of white goods will be limited, same for all the other consumables that go into a new home. So expect to see more mall closures as spending shrinks.

    Don’t forget that the entire Fed policy is to bail out the banks and not rescue the economy. By inflating asset values the banks will appear far more solvent than they really are. It will appear to show that the home owners appear to have equity in their homes. Without that fictional equity how many will walk away from a home that is in reality seriously underwater?

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