Real Estate: Housing Builds a New Foundation

Current Market Performance and Trends

• Existing home sales are down approximately 8% year-over-year.
• New home sales have declined by about 14% year-over-year.
• Mortgage lending has reached a 14-year low according to Wall Street Journal data.
• Case-Shiller home values increased 13% year-over-year, though the pace of monthly appreciation has slowed to 0.2% (one-quarter of the summer rate).
• Zillow data excluding foreclosure discounts shows home values are up only 6% year-over-year.
• Phoenix is currently experiencing monthly depreciation, while California markets show rapidly slowing appreciation.
• Household formation rates have reversed course, dropping to roughly half the pace seen in Q1 2012 and one-third of historical norms.
• The homeownership rate among adults under 34 has dropped inversely with the percentage of this cohort living with parents.

Affordability, Demographics, and Consumer Barriers

• National affordability is historically high, but California markets (L.A., San Diego, San Jose, San Francisco) face severe strain, with median buyers spending up to 40% of income on mortgages.
• Stagnant median incomes combined with rising rents prevent first-time buyers from saving necessary down payments.
• High student debt loads and tight lending standards (including FICO score requirements) are restricting first-time buyer access.
• The homeownership rate has fallen from a 2004 peak of 69% to approximately 64%, with some analysts suggesting the true rate is closer to 63% when excluding delinquent owners.
• Young adults (ages 25–34) remain significantly underemployed, with job recovery not yet reaching pre-bubble levels of 78–80%.
• Jeffrey Gundlach predicts the average annual new home starts will never return to 1.5 million, citing secular demographic shifts and changing lifestyle preferences.

Investor Activity and Market Composition

• Investor purchases peaked during the recession to convert vacant foreclosures into rentals, but this segment is now declining as prices rise and inventory tightens.
• The 2013 recovery was largely driven by investor and bargain-hunter activity rather than a broad return of family buyers.
• Investor activity has shifted geographically from the West Coast (Phoenix, Vegas) to the Midwest and markets with high foreclosure volumes.
• Stan Humphreys projects that housing demand will increasingly percolate into the rental and multifamily sectors rather than single-family ownership.
• Larry Mizell characterizes the current era as a transition from the "investor phase" to a "renter phase," noting investors played an essential role in stabilizing communities during the bust.

Builder Perspectives and Supply Side Dynamics

• New home sales are at a cyclical low (around 400,000 units), representing a new base for the industry following a decade of decline.
• Builders are responding to demand for smaller, urban units by constructing detached single-family homes with self-contained "granny units" or in-law suites (approx. 300 sq ft).
• The average size of new single-family homes has reached historical highs, driven by finishing lower-cost basements and a sales mix shift toward higher-end properties.
• Supply constraints in major urban hubs (San Francisco, New York, Boston) are identified as a primary long-term driver of unaffordability, exacerbated by restrictive zoning and regulations.
• Larry Mizell notes that replacing 300,000 aging homes annually constitutes significant pent-up demand, though current construction remains below historical norms.

Future Outlook, Risks, and Policy Implications

• Zillow forecasts home price growth to slow to approximately 3% in 2014, with flat sales volumes expected relative to 2013.
• Rising mortgage rates (projected to return to 6% in a few years) are expected to further dampen housing turnover by locking current low-rate borrowers in.
• Jeffrey Gundlach identifies a "conundrum" where higher home prices are necessary to restore equity for trade-up buyers, yet simultaneously deteriorate affordability.
• GSE (Fannie Mae/Freddie Mac) reform is anticipated to raise mortgage rates as the market transitions from public to private financing schemes.
• The NAR reports rising realtor confidence, with pending sales rising 3.4% in March, breaking a nine-month decline.
• Bank lending standards are expected to gradually loosen, with more offers extending to applicants with FICO scores below 630 and LTV ratios eroding below 80%.
• Larry Mizell argues that the current shift toward a "nation of renters" is beneficial, as rising rents drive prospective tenants toward eventual homeownership once credit improves.
• Some panelists suggest a potential long-term supply glut from baby boomers selling homes to monetize equity and become renters.