We are seeing momentum in the real estate market dissipate—this is something readers of Profit Confidential shouldn’t be surprised about, as I have been predicting problems ahead for the housing market. In fact, I won’t be surprised if 2015 is the first year home prices decline since our last drop in housing prices in 2011.
Please look at the chart of the S&P Case-Shiller Index below.
Chart Courtesy of www.StockCharts.com
After rising in 2014, and then in the first two months of 2015, home prices in the U.S. economy have been declining since March. Sadly, going forward, I expect this decline in housing prices to continue.
Three Headwinds for the U.S. Housing Market
There are three factors that will impact the housing market.
First, the Federal Reserve is expected to raise interest rates in September. The majority of the rise in the U.S. housing market over the last few years has been due to low interest rates; it drove buyers into the market. As interest rates now rise, housing affordability will decline and thus demand will decline.
Second; Americans continue to struggle to pay for even basic needs. So what are the chances they will go out and buy homes? As of April of 2015, more than 45 million Americans (or over 22 million households) are using food stamps. This number has remained staggeringly high since 2008. (Source: U.S. Department of Agriculture, July 10, 2015.)
Adding to the above, there’s countless evidence that young Americans are buried in over a trillion dollars in student debt. They don’t have great job prospects and are living with their folks much longer than they did in the past. In other words, they are unable to buy homes right now.
Third; there are still a significant number of homeowners in the U.S. who are living in a house where the mortgage amount is higher than the value of the home. According to real estate research firm RealtyTrac, at the end of second quarter of 2015, there were 7.44 million homes in the U.S. economy that were severely underwater—meaning homeowners owed more in mortgage than the value of the property. This represents 13.6% of all homes with mortgages in the U.S. (Source: RealtyTrac, July 30, 2015.) This puts a ceiling on housing prices because these people will unload their homes as soon as their market prices reach their mortgages.
Why It Won’t Get Better for Real Estate in 2015
The U.S. housing market never really recovered after the crash. First-time home buyers still haven’t jumped back into the housing market. It was the institutional buyers, bidding on blocks of homes, renovating them, and renting them out that fueled whatever recovery we had in the housing market.
Momentum in the housing market is now slowing here in mid-2015 and we are already seeing prices decline. I expect this trend to continue.