Are Fears in the Housing Sector Overblown?

Uncertainty regarding the housing sector’s recovery has metastasized on a national level, as homeowners fear the prospects of a subsequent bubble crisis. Initially, worried Americans feared that rapid appreciation rates were eerily reminiscent of conditions prior to the downturn. However, with a transition into fall, the market has suddenly stalled, instilling homeowners with a new sense of pessimism.

Of particular interest, however, are market indicators that suggest housing sector fears are overblown. Fear that the housing market’s recovery is stalling may be somewhat of a preemptive assertion. While the market has stalled, it is because of cyclical issues, not structural ones. Similar conditions are to be expected this time of year with the trajectory of our economy. However, people unfamiliar with the situation may be exaggerating the status of the recovery.

A decrease in interest among prospective younger buyers is concerning, but it is nothing to worry about at the moment. According to Hui Shan and Eli Hackel, “ homeownership hasn’t fallen out of favor and student-debt levels aren’t the main culprits for lower housing demand among younger buyers. Subsequently, Hui and Hackel attribute the lack of young buyer interest to the downturn of the economy. Ultimately, the “pent-up” housing demand will improve simultaneously along side the economy.

Unfortunately, many analysts do not concur with the theory behind Hui and Hackel’s optimism. Fear mongers believe the current recovery has been driven to an unhealthy degree by low interest rates and investor activity, particularly large investment firms that have acquired substantial amounts of property. Meanwhile, prospective homebuyers can’t qualify for loans, because of some combination of having too much debt (especially student loans for younger buyers), stagnant incomes and tight credit restrictions.

Once again, however, Hui and Hackel disagree, suggesting that the “pessimism about the housing recovery is overdone.”

Of particular interest to the authors is the homeownership rate of Americans between the ages of 25 and 44. This age group represents the largest cohort of first-time buyers and move-up buyers and should reflect the status of the market. Compared to the 1985-1994 period (when the overall homeownership rate was mostly flat), homeownership among 25-to-44 year olds was reduced by around 1.1 million owners last year. They believe that the shortcomings are directly correlated to those in the median-to-high income households.

In those states that witnessed the unemployment rate drop less than one percentage point below the average; the rate in which younger Americans owned a home remained similar in 2012 to their 1985-94 levels. Conversely, states where unemployment rates were higher than the average, homeownership rates for younger renters fell by four percentage points compared to their 1985-94 levels.

“As the housing and labor markets gradually recover, we expect to see the homeownership rate in this population normalize,” Shan and Hackel write.

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