The standard case in a housing recovery in America is as the pace of new homes built slows, the natural household formation will quickly take up the slack and our problems are over. That said, that's been the argument for over 2 years now. It will be correct eventually but as with many things, I continue to stress this is not your typical recession. This $8000 tax credit (handout) to first time homebuyers is once again going to 'draw in' future buyers that would be the natural buyers of 2010-2012. Which we have to do because the mortgage circus we did in 2004-2006 drew in the natural buyers of 2007-2009. Do you see how it really never ends in the US? We won't let the market 'settle' or put better, we'll waste countless national treasure doing everything in our power to slow the pace down.

Aside from the bribery to constantly get people into homes either via unnaturally manipulated mortgage rates or handouts, we have the case of the LACK of household formation. What's different this time? (Mark, it's NEVER different. Reader: Yes it is)

  1. Structural unemployment and underemployment
  2. Outsized unemployment among the young and fresh out of college

  3. Outsized debt (mostly due to college) among the young adult who is a few years out of college and supposedly forming a new household soon

  4. A shrinkage in divorce as people cannot afford to separate (which would create new households) [Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]
  5. Relatives moving in together - parents with adult kids, or adult kids with parents because of the economy.

  6. Many people are staying in homes they have no right to be in - they put nothing down (or near nothing), took out exotic loans, and the taxpayers money is now coming to their rescue to keep them in under modified loans
  7. Many people are living rent free in their homes as the foreclosure process drags on, or banks are reluctant to take balance sheet hits
  8. Many have demolished their FICO score so once they leave their rent free home they won't be buying another home anytime soon.

As I wrote in the April piece

Let me preface this entry by saying I was an early and loud housing bust proponent when (a) the Kool Aid of the day was housing prices could never fall nationally because... they never have & (b) this is just a subprime issue (ignoring the Alt A loans, option ARM loans, and indeed prime loans). [Mar 19, 2008: Alt A Mortgages Beginning to Break Down] I called for housing prices to drop dramatically - against the grain. [Dec 8, 2007: Analysis - What Should Housing Prices Be Today?] And in the past 12-15 months I've said government will do everything in its power to once again prop up prices from where they should go. And so the white knights have tried to reflate a tired bubble.

Most regional housing recessions take many years to play out... 6 to 8 years. We peaked as a nation (housing prices) in 2006, so we are roughly entering year 3. While all the government actions to prop up housing prices will help to some degree, this is still going to take a long time to play out. Lower mortgage rates artificially prop up prices which is the government's go to plan this entire decade. Other people are now enjoying government modified mortgages (taxpayer subsidization) which make their payment 31% of their income, even if that means their new mortgage rate is 1-2%. Whatever it takes to make sure people who took out loans they had no business getting, for houses 2x as big as they can afford, get to stay in them. [Mar 5: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners]

So yes... EVENTUALLY household formation and the relative lack of building will get supply and demand dynamics in accord. But we are still not close - even though those who have been incredibly wrong on the housing downturn still get the media spotlight even today as they crow the same joyous commentary. There appears to be no shame in punditry.

Let me add a 9th reason - a new trend is emerging; those in economic duress (many underwater) [Mar 4, 2009: 1 in 5 Houses Underwater] are taking on boarders. And just as I say with savings, Americans are not taking on boarders out of choice, it is out of necessity. That's just another stress to the housing market and household formation. Suddenly you have new housing stock, where renters can go. In turn, apartments are vying for less people and need to reduce rates. Which further pushes stress on house prices as the rent v buy decision skews even more to rent. And on and on we go, until all the money the government has wasted still gets us to the same spot we'd eventually head to anyhow.

Via Boston.com

  • John Murphy does not want a roommate; he needs one. The former advertising executive, who bought his Milton home when he was earning a six-figure salary, has been unemployed for nearly a year and a half and hopes a boarder will help him make mortgage payments. Murphy, 51, is looking for someone within 10 years of his age who can afford to pay $1,200 a month to share his house and garden.
  • “Looking for a roommate, it’s a bit of a blow to the ego,’’ he said. “But it all boils down to: You gotta do what you gotta do.’’
  • Murphy and other reluctant roommates like him are being forced by economic necessity to open up their homes and share living space. They have lost their jobs or taken pay cuts because of the recession. Many are age 40 and older, which makes their predicament especially difficult to accept; after decades spent working to buy some privacy, they find themselves facing living arrangements reminiscent of their college days.

Key point for those that abstain from Kool Aid

  • Mark Obrinsky, chief economist at the National Multi Housing Council in Washington, D.C., ..... said home ownership rates and apartment occupancy rates have fallen nationwide even though the general population has grown.
  • That indicates more people are living with family, friends, and strangers, according to Obrinsky.

Onward...

  • Roommate Express (roommate matching service) said many of its Boston-area clients are people who bought homes at the height of the market and can’t sell them now without taking a loss.
  • That’s what happened to Gayle White of Boylston. She and her husband purchased a three-bedroom house on an acre and a half in 2004 when prices were at their peak, but they have divorced. White couldn’t afford to keep paying the mortgage on her salary as a paralegal, but didn’t want to lose money by selling. So about a year ago, White, 43, took on boarders.
  • “I never expected to have a roommate in my 40s,’’ she said. “That’s something you’re supposed to do in your 20s.’’
  • Jeannie Rogers, an unemployed car saleswoman who said she values her privacy, is looking for someone to share the condominium she rents in Newburyport. It’s small, she said, but features a newly renovated kitchen. The monthly rent is $1,750, plus utilities, with a boarder’s share being $825.
  • Rogers, 49, said she hopes to find a roommate before her unemployment benefits run out. “I’d rather be alone, but the rent is so high,’’ she said.

Again, no matter how much the government tries to do by stealing from future generations to blackmail people to spend money they don't have (and I give the government A+ in effectiveness on that charge), the trend is not going to change. Americans - not by choice - but by necessity will be forced to change their lifestyle and save for the first time in a decade. We're just in inning 1 of this sea change and unfortunately still in denial about it.

[Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?]

[May 10, 2009: NYT - Shift to Savings May be Downturn's Lasting Impact]