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Johnson: Housing Hits a Plateau

Higher prices and interest rates, tight access to credit, and low inventories conspired to curb housing market growth, but there is still life left, says Morningstar's Bob Johnson.

Johnson: Housing Hits a Plateau

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We have a lot of conflicting data about the housing market. I'm here with Bob Johnson, our director of economic analysis, to bring some clarity. Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, just this week alone, we had a lot of conflicting data with new home sales looking pretty good and existing home sales are looking a lot weaker. How do you characterize the market right now, in light of all of this data?

Johnson: The data is terribly confusing. And you can toss in prices and homebuilders reporting relatively poor results into that mix, too. I think we all need to step back and take a breath. We had a big increase in housing coming out of the recession, and now I'd characterize it as a market that has kind of plateaued a little bit. Maybe it's not in the same month at the same time, but I think we really did see a quick improvement in existing homes, new homes, housing starts--all of them, generally, were trending up sharply from the 2011 timeframe onward. And I think now, we've clearly kind of paused and the data this year isn't all that much better than last year.

Glaser: So, why have we slowed down? What's driving this plateau?

Johnson: I think there are probably two things that are key drivers. Certainly, number one is that affordability has dipped, and that's got two components as well or maybe even three. The first is pricing. It's great for getting us out of the housing recession; it's great for getting people out from underwater mortgages. But we did see prices go up sharply, especially in 2013; we were up well over 13% on some metrics. That was a big number, and I think we're beginning to drop back in those now. But that certainly slowed when people saw the high prices--maybe a little bit of a sticker shock: "Gee, I thought we were in a tough market; look what I'm having to pay." So, the pricing was certainly an issue.

Mortgage rates were probably the number two issue. What happened there is, with the "taper tantrum" that we had a year ago last spring, what that really created was a higher rate. We went up a whole percent in mortgage rates, and that pulled some demand forward as people rushed to beat those rates in 2013. But it also then meant the hangover that we got higher rates and we had that pulled-ahead demand; so things have slowed because of that. Those are probably the two big issues. Inventory was certainly an issue, and I think that affected things, too.

Glaser: How about access to credit, is that holding things back still?

Johnson: That really held things back. The average FICO score on an approved mortgage went from 710 before all this mess hit to 760; it stayed there for four years, and then we slowly started a trend downward. Now, it's in the 740s--still not back to the easy money that we've seen. It's better now, but still not as good as it was.

Glaser: And how about inventory levels?

Johnson: Inventory levels have moved up a little bit. Before you couldn't even find a house in certain price categories, and I think we have seen some of those come back on the market now--especially homes bought by investors who fix them up and put them back on the market. So, I think we have seen some improvement in inventories, at least in most price categories.

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Glaser: So, how would you characterize this recovery then, looking at past housing recoveries or coming out of other past recessions? Is it kind of similar? Is it different? How do you think about that?

Johnson: It's certainly not your father's housing recovery after all. Certainly, one of the key benchmarks this time was that housing really didn't start getting better until credit got a little looser in 2011. The recovery began way back in 2009. It was driven by autos; it was driven by other consumer spending this time. And the housing part of it didn't kick in until much later, which was good news, too, because that means it's going to extend much further in the years ahead. So, that's certainly the silver lining of a slow start.

Some of the other things that have happened out there are really pretty dramatic. There has been a big interest in apartment homes. People don't want to get tied down to a large single-family home, so we've seen a lot of interest in apartment dwelling and less interest in owning a home. And clearly, right now, starts for apartment buildings are probably relatively close to where they were when the recession began. In other words, we've recovered almost everything. Single-family homes, on the other hand, are still running probably less than half, for sure, of what they were at the peak. So certainly, the interest in single-family homes is way different than it was the time before.

Probably the third big thing I would say is that we've had more interest in intercity homes, or homes closer to the city center. And why is that? Well, we have an aging population whose kids have now moved out of the nest, and people want smaller homes and want the social activities of a downtown area. So, that's certainly happened. On the other end of the scale, young people have shown a distinct interest of being downtown and not stuck out in the suburbs. So, all of that has created a fair amount of intercity demand, which is new. And meanwhile, the tract homes and the McMansions that are 50 miles out aren't coming back yet.

Glaser: Taking this all together, what's your outlook for housing over the next couple of years? Can it drive more economic recovery?

Johnson: I think it has a lot of economic life. And, yes, we may have a little pause here; but I really do think that, at only 3% of GDP versus a more typically 5% of GDP, I really think we've got a long ways to go in the housing department. It's not going to be the same way [it was before]; we're certainly going to have more interest in remodels rather than new tract homes. And clearly, the builders--the ones who adapt to people wanting smaller homes or lesser-priced homes or homes that close quickly or homes that aren't 50 to 60 miles away--the builders who can play on those trends will do very, very well. But conventional tract builders may have a whole bunch of issues going forward, and that may weigh on the numbers for some time.

Glaser: Bob, thanks for your take on the market today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser.

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