In November, existing-home sales in the U.S. declined 6.1% from the previous month. They dropped to the lowest annual pace since May of 2014, falling to 4.93 million units from 5.25 million in October. (Source: “Existing-Home Sales Lose Momentum in November as Inventory Slightly Tightens,” National Association of Realtors web site, December 22, 2014.) December existing-home sales are yet to be released. The numbers for existing-home sales do not bode well for the housing market in 2015.
And the housing market outlook in 2015 for the new-homes market doesn’t look any better. See the chart below of new homes sold in the U.S. economy. In November, the annual rate of new homes sold declined to 438,000 units—the lowest since July of 2014. (Source: U.S. Census Bureau, December 23, 2014.) Please note the red downward arrow I’ve drawn on the chart. Current new-home sales in the U.S. economy are still down approximately 60% from their 2012 peak.
Chart courtesy of www.StockCharts.com
Where Have the First-Time Home Buyers Gone?
As I’ve said over and over again in these pages, to get a real recovery in the housing market, we need first-time home buyers entering the market—not investors buying units to rent out. As it turns out, real home buyers are still shying away from owning a home.
In the first 11 months of 2014, first-time home buyers amounted to just 29% of all the existing-home sales. In a normal housing market, they would account for more than 40% of sales.
And I can see the weakness of the housing market in the declining mortgage applications. Look at JPMorgan Chase & Co. (NYSE/JPM) for instance. In the third quarter of 2014, its mortgage originations numbers fell 48% from the same period a year ago. (Source: JPMorgan Chase & Co., October 14, 2014.)
Interest Rates and Affordability: Big Negative Factor for U.S. Housing in 2015
The biggest risk ahead for housing has to do with rising interest rates. The Federal Reserve has made it clear that it plans to raise interest rates in 2015 and 2016. Obviously, as the Fed raises interest rates, mortgage rates will rise. And higher rates will impact those who have taken out adjustable-rate mortgages (ARMs) on their home purchases.
The obvious: if it is so hard to get the U.S. housing market moving while interest rates are at historic lows, how can it get any better as interest rates rise? Being a “real estate man” practically all my life, I can tell you nothing has a bigger impact on investment real estate cap rates than rising interest rates…nothing has a bigger impact on personal home affordability than interest rates.
What to Expect from U.S. Housing in 2015
In 2014, homebuilder stocks showed a relatively flat performance. In the first few trading days of 2015, as the general stock market retreated, the Dow Jones U.S. Home Construction Index fell by about three percent. Going into 2015, I’m negative on the homebuilder stocks.
At the very best, the U.S. housing market in 2014 was anemic. Earlier in the year, we heard mainstream economists suggest home prices would continue to rise in 2014 at the same pace as they did in 2012 and 2013. They were completely off from their prediction. Indicators like the S&P Case-Shiller Home Price Index showed home price growth declined in several months of 2014. Yes, the luxury high-end home market was rising in price in 2014, but the general market (which includes mid- to low-end homes) was very soft.
In 2015, I don’t expect much from the U.S. housing market. When I look at the data, it tells me any housing market growth we had is losing momentum. I don’t expect the housing market to outright collapse in 2015, but I do expect it to continue on a path of gradual decline. I believe what we saw from housing prices in 2012 and 2013 was nothing but a “dead cat bounce” from a severely oversold housing market.