For years we have heard a thesis that low inventory and tight lending are stalling the U.S. housing market. In the six years I have written on housing economics, I have been battling these two myths. Instead the true villains of the housing market are not low inventory and tight lending but demographics, housing debt, lack of strong wages, lack of liquid assets and poor affordability.

In an article last year I addressed one of these villains, housing debt.

“Housing Debt Still Haunts Some Move Up Buyers”

https://loganmohtashami.com/2015/10/19/housing-debt-still-haunts-some-move-up-buyers/

Briefly, if you use the national affordability index, a home owner would need, conservatively, at least 28%-33% equity in their home in order to have the down payment and transaction costs required to sell and move up to a bigger home. The inability to sell and move up is one of the primary reasons the market is struggling to get to six months of inventory. The only time in this century the market has had greater than 6 months inventory was during the housing bust & recession when the market was flooded with distressed properties.

The following two graphs show that currently housing inventory is actually higher than pre-recession levels when sales were highest.

Sometimes a picture is more pure in telling the truth that anything written.

We had more annual housing inventory from 2012-2016 than any period from 1999-2005 when interest rates and sales were lower.

Note: Without the the extra 15%-20% above historical trend cash buyers, existing home sales would be under 5 million every single month in this cycle post the 2010 home buyer tax credit.

Home loans haven’t been this cheap in more than a year. http://redf.in/22fD39d @ FreddieMac # mortgage



Interest rates have been under 5% since early 2011 and still the demand curve for both new and existing homes have been light.

Note: Every single housing cycle has had 2% + lower rates in each new cycle for over 30 years. For this trend to continue we would need to see 1.25% – 2.25% 30 year fix rates in the next cycle.

From Calculated Risk:

http://www.calculatedriskblog.com/2016/04/mba-refinance-applications-drive.html

As we can see we had much higher mortgage demand even with lower inventory from 1999-2005. Of course some of this was due to fake demand from exotic loans. However, demographic economics were good for housing years 1996-2007.



Prices for existing homes have taken off over the last 20 years which means increased debt sizes are needed to service the loan. This impacts the would be buyers ability to move up because they are always chasing a higher priced home. Additionally, many first time home buyers are making down payments below 20%. Therefore they are starting out with much less equity. It will take them much longer to build the equity required to move up.

From Doug Short:



http://www.advisorperspectives.com/dshort/updates/House-Price-Index



In real terms, therefore, home affordability is the problem not low inventory. We have more inventory now than during the housing bubble years but not the demand. Demographics, lack of exotic loans, high home prices and lack of liquid assets are the main reasons were are not selling homes.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987.