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The Flower Has Not Wilted Sufficiently to Abort Recovery

12:00 AM, May 31, 2014 • By IRWIN M. STELZER
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Here are the facts. The good news is that sales of existing homes (90 percent of all sales) in April rose 1.3 percent from March, the first monthly increase this year, and of new homes by 6.4 percent; the bad news is that existing home sales were 6.8 percent below April of last year, and new home sales were 4.2 percent below year-earlier levels. The good news is that prices have continued to advance, by 5.2 percent in April; the bad news is that the increase was the lowest in two years, which may of course turn out to be good news after all if it makes home-buying more affordable for more people. The good news is that interest rates on conventional 30-year mortgages have fallen in seven of the last eight weeks, to 4.25 percent from 4.69 percent at the end of last year, according to Bankrate Inc.; the bad news is that rates are significantly above the affordability-enhancing 3.5 percent level reached a year ago. In short, sales and prices are better than in March, but not as “hot” as a year ago.

The worse news is that first-time buyers are having difficulty getting credit as nervous banks keep credit-quality standards extraordinarily tight, to the consternation of politicians who want standards lowered so that income-constrained buyers can realize the dream of home ownership. No surprise that politicians, who only a few years ago criticized bankers for easy-handed lending, and don’t have any of their own “skin in the game,” should worry less about consumers’ ability to meet their mortgage obligations than bankers who seem to have learned something from the wave of foreclosures that followed the popping of the last housing bubble. Throw in the fact that almost 10 million homeowners, some 20 percent of the U.S. total, are “under water”—their homes are worth less than their mortgages—and another 10 million have very little equity in their homes, and it is easy to see why it is not only first-time buyers but potential upgraders who are frozen out of the low-end of the housing market. On the high end, in cities such as San Francisco and New York, prices have appreciated so much that renting has become an attractive alternative to buying. All of which might explain why pending home sales—deals signed—fell in April by 9.2 percent compared with a year earlier, to the lowest level since last June. The higher-priced end of the market seems to be doing better, as builders Toll Brothers, which specializes in that segment, is reporting robust sales and an ability to obtain higher prices for its homes.

The bloom may be off the housing rose, but the flower has not wilted sufficiently to abort the recovery. With the inflation rate having doubled to the 2 percent Fed target, should the predicted increase in economic and job growth occur, chair Janet Yellen and her doves will find it more difficult to ignore their hawkish colleagues. But not impossible. 

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