“Recent economic reports suggest a bleaker picture for housing…. Some of the weakness reflects the cold weather in much of the country. However, higher home prices and mortgage rates are taking a toll on affordability.”
This was the sober report yesterday from the chairman of the authoritative S&P Case-Shiller Home Price Index, adding that “the strongest part of the recovery in home values may be over”.
The problem is summarised in the chart above, which shows the ratio of earnings to average US house prices for the main racial groups:
- The ratio for whites is similar to the average ratio at 7.7x, with that for Asians at 6.4x
- But the ratio for blacks is 9.5x, and for Hispanics it is 10.4
Essentially, as the blog noted back in December, the US now contains two distinct groups with very different profiles:
- Whites earn $42k/year and have median age of 42 years: Asians earn $49K and have median age of 37 years
- Blacks earn $33k and have median age of 33 years: Hispanics earn $30k and have median age of 28 years
- There are 84m white and 6m Asian households: there are 14m Hispanic and 16m black households
This demographic clearly explains the problems of today’s housing market. The wealthy ageing white BabyBoomers have a similar profile to Europeans. Their children are leaving home, and they are starting to enter retirement. Thus they are not going to provide much support for the housing market.
The younger poorer black and Hispanic populations could provide some support, but they can’t afford current price levels. Credit standards have tightened since the subprime era, and few lenders will provide mortgages at multiples of 10x earnings any more.
Equally important is that today’s house price to earnings ratios are still too high. They are all 20% higher than average ratios between 1979-99, before the housing bubble began.
Declining fertility rates are also having a major impact. Census Bureau data shows there are now only 21m households in the prime 25-34 age group of first time buyers, and just 22m in the 35-44 age group. Whereas there are already 28m households in the 65+ age group, and 23m in the 55-64 cohort. The result is that home ownership rates are already back at 1996 levels, and set to fall further.
Demographics are clearly driving the housing market, despite all the efforts of policymakers to turn back the tide. Smart companies will adjust their expectations and strategies accordingly.