One step in the housing chain reaction. Photographer: Daniel Acker/Bloomberg

Where Are All the Homebuyers?

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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This week, the New York Times launched The Upshot, combining aspects of the Washington Post's Wonkblog with Nate Silver's 538. Edited by Pulitzer Prize winner and former economics columnist David Leonhardt, we linkedto the inaugural piece "America's Middle Class Is No Longer the World's Richest.''

This morning, I want to direct your attention to another nice Upshot column, this time, by Neil Irwin: "Why the Housing Market Is Still Stalling the Economy.'' I like the column, which tries to explain why the housing market is still soft. It does a nice job of combining history, demographics, current sales data and charts.

Irwin focuses on two areas: Residential overbuilding during the boom and a lack of new household formation since the bust. You probably recall the massive new home construction during the boom; economist David Rosenberg has pointed out that we are still at levels of new home construction and sales that are associated with the bottoms of prior recessions.

Today's housing-market recovery is at the low reached in other slumps. Source: Calculated Risk.

The other issue Irwin discusses is the lack of new household formation. You may not be aware that "Before the recession, 27 percent of 18- to 34-year-olds lived with their parents. Now that share is 31 percent." The weak job market is most likely to blame.

Tighter mortgage credit is briefly mentioned, but at this point in the recovery, I think it is a well-known factor.

I have spent an inordinate amount of time on the subject of residential housing. I wanted to supplement Irwin's column with two additional observations. These involve homeowner equity and buyer psychology. My view is they impose a huge additional drag on the housing recovery.

Homeowner equity is simply how much more a house is worth than the underlying mortgage. A house that would fetch $500,000 in a sale with a $400,000 mortgage has $100,000 of equity. This equity, equal to 20 percent of the purchase price, corresponds to the amount that could be used for a down payment in a subsequent move by the owner.

When you consider the chain of purchasers that typically occurs in a residential real estate market, you will understand why homeowner equity is so important. Any home sale is usually part of a series of interdependent transactions. The newlyweds who buy a starter home are usually doing so from a married couple, who have a 3-year-old and another on the way. They want to buy a larger home with more bedrooms for the kids, and purchase that from the couple who are trading up to a nicer home in a better school district. Those sellers purchase their new home on more land, or with a better view or some other factor. The long chain of buyers and sellers, beginning with the first-time buyers, explains why household formation is so crucial.

But beyond the first-time buyers, there are other problems with the links in the home-selling chain. Jonathan Miller of Miller Samuel Inc. noted the down-payment issue was directly related to the low-equity problem:

Sellers, when they sell, become buyers (or renters) and with >40% of mortgage holders having low or negative equity, they don't qualify for the trade up. We have been so focused on negative equity that we've paid short shrift to the impact of low equity.

This also creates a problem with decreased inventory, which drives prices higher and paradoxically hurts first-time buyers.

As households have been deleveraging from the mid-2000s credit binge, they also have maintained a low savings rate. Combine that with relatively low household equity -- as well as no-equity and underwater households -- and you end up with a housing market that lacks a crucial ingredient for a robust recovery.

The other factor worth mentioning is psychology. I discussed this extensively two years ago, but it is worth revisiting.

Simply stated, following any sort of major dislocation, such as a stock market crash, market psychology shifts. Potential homebuyers are less concerned with what will actually happen and more focused on what just occurred. That is what drives their behavior.

They fear falling prices; they worry about losing their jobs; they are concerned about being unable to sell their homes if they have to. All of the things that just occurred in the last crash get projected forward in their minds.

Add these two factors to those mentioned by Irwin, and you end up with a residential real estate market that isn't carrying its weight in the gross domestic product data.

Eventually, time will heal this market. Meanwhile, the recovery grudgingly trudges along.

See also:

"The Price of New Homes Is Surging — in Part Because Houses Are Getting Bigger'' (Wonkblog)

"Why the Housing Market Has Slowed'' (Real Time Economics)

"Millions Remain Trapped by 'Effective' Negative Equity in Q1, Even if They're Not Underwater'' (Zillow)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at

To contact the editor on this story:
James Greiff at