The political leaders in Washington, D.C., are decrying daily for the Federal Reserve to lower interest rates to spur the economy and housing market. The Federal Reserve interest rate the first week of September was 2.25%, while the corresponding average 30-year mortgage interest rate hovered around 3.75%. By all metrics, these interest rates are still at historic lows. For perspective, when I started in the construction supply business in 1979, the average 30-year mortgage rate was over 11.2%, and until the Great Recession most homeowners would have been thrilled with an interest rate of 6%.
Will lowering interest rates create a housing boom?
I don’t believe so, because interest rates are not the reason why homeowners are not buying. Crushing household debt, housing costs and stagnant wage growth have created a toxic housing environment, which is creating a nation of renters, adult children living with parents and homelessness. Housing is truly the only remaining sector in America that cannot be outsourced to foreign companies or workers, which is why many say, “So goes housing, so goes the United States economy.” For decades, political leaders have used housing as their magic wand to crank up the economy.
The Federal Reserve Bank of New York Center for Microeconomic Data reported that in the second quarter of 2019, United States household debt increased $192 billion to a whopping $13.86 trillion, which marks the 20th straight month of increases and a record debt level exceeding the previous $12.68 trillion in the 3rd quarter of 2008. Just a reminder — the third quarter of 2008 was when the United States economy collapsed ushering in the Great Recession.
Mortgage balances rose in the second quarter by $162 billion to 9.4 trillion, which also surpassed the record for 2008. Plus, there are huge debt issues in other areas of total household debt — including $1.48 trillion in student debt, $1.3 trillion in auto debt, and $870 billion in credit card debt. Americans are in debt up to their eyeballs. Entry level homebuyers have too much crushing debt to buy a home. For many, affording a mortgage payment at any interest rate is out of the question.
Home affordability is a huge issue for most who would like to buy a home. The cost to build a home has increased at all levels because of increased land cost, legal issues (including building codes), impact fees and cost increases in material and labor. What could be constructed 20 years ago in many markets is not permissible today, and tight government control is sucking out the economies of scale for most entry-level buyers. According to the Orlando Regional Realtor Association, the average home selling price in Lake County in July 2019 was $246,726 while the national average home selling price was $388,000. Add the cost of property taxes and homeowners insurance to these prices, and you have eliminated a huge majority of working people who can afford to buy a home.
Although wages have improved somewhat over the last year or so, they have not been keeping up. For the most part, wages have been stagnant for more than a decade. According to the Federal Reserve Bank of Atlanta, since November 2008 median wage growth has not topped 4.0 percent. Wages are just now improving, primarily off the push by state and local governments to increase minimal wages. While the push for a $15 minimal wage may be scary for some, the lack of resistance by many large companies indicates that the new $15 wage target could also be used to suppress wages of lower to middle managers. If $15 is considered the new going wage, this could knock more people out of the housing market as it could possibly restrict upward wage mobility of lower skilled workers. Wage inflation has not kept up with housing affordability.
Debt, housing prices and stagnant wages have converged to create an economic upheaval, suggesting the housing market will continue to underperform. The old economic and housing paradigms of the past like interest rate decreases will probably not move the markets.
To add credence to my theory on the housing market, consider these facts:
- In 1979, the United States had 1,745,100 housing starts compared to the current annual amount of 1,191,000. Since 1979, housing starts have dropped 31.8%.
- In 1979, the average 30-year mortgage was 11.2% compared to 3.75% today. That is a 66.6% drop — loans are a lot cheaper.
- Housing starts are down 31.8% with a 66.6% decline in mortgage rates, which doesn’t make sense.
- The main difference between 1979 and 2019 that makes this equation even worse is the United States population in 1979 was 225.1 million compared to a population of 329.4 million today — that is a 46.3% increase in population.
The increase in population should be causing a boom in housing. However, it’s not. The reason is simple: debt, affordability and wages. The Federal Reserve could cut interest rates by a point and there would be little impact on housing.
Don Magruder is the CEO of RoMac Building Supply. He is also the host of the Around the House TV show on LSTV and LakeSumterTV.com at 1 and 6:30 p.m. Monday, Wednesday and Friday; at 9 a.m. and 4 p.m. Tuesday and Thursday; and at 7 a.m., Noon and 6 p.m. Saturday.