6 Reasons Housing Prices Aren't Rising

The rise and fall of the housing market was one of the more spectacular bubbles of recent memory. And the bursting of that bubble is still having a profound impact on the economy, even though we're now several years past the peak. Yet, it doesn't look like housing prices will be bouncing back anytime soon.

Last week, I examined the perfect storm of factors that led to the incredible inflation of housing prices and some of the reasons housing prices have fallen back to earth. Although I do believe that prices have stabilized, there are many headwinds that will make it hard to see impressive gains coming anytime soon. This week, we will look at six reasons why demand isn't likely to pick up.

1. Unemployment
Even though the employment situation has improved, many people are still without jobs and even more are underemployed. People without jobs generally don't buy homes. And the uncertainty created by the rocky jobs situation also keeps buyers on the sidelines. Before deciding to take the plunge and buy a home and be tied to one city, buyers want to be sure they have good job security and a stable income.

Even those with jobs who are afraid of layoffs aren't terribly likely to make a bid on a property. They are much more likely to rent or live with relatives and wait until they have more confidence about the job market before thinking about buying. Until there is a robust recovery in the job market, not just one in corporate profit, there won't be big housing-price increases.

2. Household Formation
A big driver of the housing market is the creation of new households when young people go out on their own or through other vectors such as divorce. More young people are finding the working world increasingly hostile and are choosing to live with their parents in order to save money or to have an inexpensive base to search for a job. Even more people who might prefer to live alone are finding roommates or sleeping on couches. Now of course many young people aren't necessarily going to find their first job and then immediately buy a home, but they do represent future buyers. The longer household formation remains depressed, the longer it will be before demand begins to rise again for houses.

Lower divorce rates also have an impact. It's unlikely that the recession created a lot more marital bliss. What is likely is that it has become financially very difficult for unhappy couples to split up. It may be impossible to sell the home, or one partner might not feel secure enough to venture out on his or her own. This might reverse quickly, but it is having a detrimental impact on demand at the moment.

Outside of Americans creating new households, another potential demand from housing is from immigration. But this seems unlikely to play a meaningful role in the coming years. The political winds have shifted against any large increases to legal immigration and toward stepped-up border enforcement, and a poor economy has led to a decline in numbers of undocumented workers looking for housing.

3. Shadow Inventory
According to seasonally adjusted data from the Census Bureau, there are six-and-a-half months' worth of housing inventory. This is an improvement from the more than 12 months' of supply during parts of 2009, but it is not telling the entire story. These statistics can only capture houses that are actually listed and miss the so-called shadow inventory. Shadow inventory includes houses that the owners want to sell but aren't even bothering putting on the market because they don't believe they can get the price they want.

There are likely a large number of baby boomers looking to downsize and banks looking to unload foreclosed properties. As prices begin to rise, these sellers will flood the market with new supply, pushing prices back downward. Although it is hard to tell exactly how much shadow supply is on the market, this dynamic could be felt for years to come.

4. Underwater Mortgages
Part of the natural housing cycle is a family moving up the housing food chain as more kids come and incomes expand. But this is made very difficult when one fourth of mortgage holders are underwater. Even if they wanted to move to a larger place, at best they would have no equity when they left their existing home. And though there is talk of people strategically defaulting on their mortgages, this seems to be mostly talk. By and large, homeowners feel a moral obligation to pay back their loans, and people are fearful of how a default would affect their credit scores. So more likely than not, many of these people underwater will just remain in their homes until they are forced by finances or circumstances to leave. This removes another group of buyers from the fray.

5. More Stringent Mortgage Requirements
Access to mortgages is a key driver of housing demand, and the ease of borrowing money was a major reason the bubble was able to inflate so quickly. Those trends have, of course, now reversed. Larger down payments (particularly for jumbo loans) are the norm now, and the exotic mortgages are mostly a thing of the past. The new requirements mean there are some families who were out there buying properties in the boom that couldn't qualify for a mortgage now, and they might never be able to qualify. Of course, this isn't all together a bad thing. Giving mortgages to people who couldn't afford them is one of the reasons we got into this mess in the first place, and the credit quality of borrowers has markedly risen since then. But it is impossible to ignore the impact of the changes to housing prices.

How Congress winds down and replaces the government sponsored enterprises such as Fannie Mae (FNMA) and Freddie Mac (FMCC) will also affect mortgage availability. These groups provide subsidies and liquidity for the market that keeps rates low and banks lending. Chances are the government will continue to provide support for housing, but exactly how it is structured will have a real impact on housing demand.

6. Rising Rate Environment
Rates are near record lows right now. The Federal Reserve is keeping monetary policy loose in an attempt to keep the recovery moving and in part to prop up the housing market. This can't go on forever. The central bank will eventually have to raise rates as inflation picks up to keep the economy from sliding into recession. As rates rise, it will be a further headwind to prices.

All this being said, it is important to note that prices really do seem to have stabilized, and another major decline in prices seems a distant possibility. And as Morningstar's Eric Landry points out, we are seeing seasonal strength in prices, something that had been absent for some time. But anyone expecting to see decent returns in housing anytime soon is likely to be disappointed. The current trough in pricing might go on for some time.

What do you think? What is holding back home prices? Do you think prices could fall even more from current levels? Has the U.S. love-affair with homeownership ended?