U.S. Housing Market: 3 Reasons Why Prices Will Decline

Housing MarketThe U.S. housing market has come under pressure as housing starts have stagnated since the end of 2013, interest rates are poised to rise this year, and first-time buyers are missing from the housing market.

Buyers Missing From U.S. Housing Market

In February of this year, first-time home buyers accounted for 29% of all the existing-home sales in the U.S. economy. (Source: National Association of Realtors, March 23, 2015.) In a healthy housing market, first-time home buyers usually make up 40% of transactions.

But the lack of participation by first-time home buyers in the so-called U.S. housing market “rebound” is just the tip of the iceberg. According to a study by the National Association of Realtors (NAR), the gap between household income and housing costs is increasing. As a result, it is becoming more and more difficult to become a homeowner.

In a recent report, the chief economist at the NAR said, “…current renters seeking relief and looking to buy are facing the same dilemma: home prices are rising much faster than their incomes.” He added, “With rents taking up a larger chunk of household incomes, it’s difficult for first-time buyers – especially in high-cost areas – to save for an adequate down payment.” (Source: National Association of Realtors, March 16, 2015.) In other words, if there was any hope for renters to turn into homeowners, it’s dissipating quickly.

Please look at the chart below of new-home sales (green area) and housing starts (red line).

Houses Sold

Chart courtesy of www.StockCharts.com

Since the end of 2013, the number of new homes being built has declined. I predict regular home sales will eventually do the same—stagnate. Also note that both home sales and housing starts are well below the rate seen prior to the housing crash. At the very core, this chart shows an anemic U.S. housing market.

Federal Reserve Rate Hike

Then there’s an even bigger threat: the Federal Reserve raising interest rates in 2015.

The Fed, in its most recent economic projection, said it expects the federal funds rate to be around 0.625% at the end of 2015, up from its current 0.25%. (Source: Board of Governors of the Federal Reserve System, last accessed April 1, 2015.)

Currently, with the federal funds rate at 0.25%, 30-year mortgage rates in the U.S. economy stand at 3.71%. (Source: Freddie Mac web site, last accessed April 1, 2015.) If the Federal Reserve raises interest rates to 0.625%, it will mean an increase of roughly 150%. With this, mortgages will rise sharply and these rates will put pressure on the U.S. housing market.

2015 Housing Market Outlook

You can’t have growth in the U.S. housing market if potential buyers are struggling. That’s why I expect U.S. home prices to decline this year. And if the soft housing market gets even softer, it will mean trouble for the fragile U.S. economy.