US house starts Feb15Data over the past month continues to confirm my fears that the US housing recovery is going into reverse.  The argument was summed up yesterday by S&P’s chairman, when reporting Case/Shiller housing price data for December:

“The housing recovery is faltering. While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession”.

Last month should have been a good month for the housing market, as January 2014 was marked by some of the worst winter weather ever seen in the US.  Yet existing home sales last month were up just 3.2% versus 2014, and even fell 4.9% versus December’s already weak figure.

A survey by the National Association of Realtors highlights one key reason, that homeowners now tend to stay 10 years in a home before moving, rather the 7 years that was common in the past.  The problem is that prices are too expensive for younger people, and so the percentage of first time buyers is now down to 28%, compared to the 40%+ level common when the market was booming.

Another key element is in the chart above, which shows home ownership rates since 1980 from the US Census Bureau.  It highlights how increased home ownership became a national policy under President Clinton.  He consciously aimed to boost home ownership, as he set out in 1995 when launching the new policy:

“It seems to me that we have a serious, serious unmet obligation to try to reverse these trends (of lower home ownership). As Secretary Cisneros says, this drop in home ownership means 1.5 million families who would now be in their own homes if the 46 years of home ownership expansion had not been reversed in the 1980′s.

Now we have begun to expand it again. Since 1993, nearly 2.8 million new households have joined the ranks of America’s homeowners, nearly twice as many as in the previous 2 years. But we have to do a lot better. The goal of this strategy, to boost home ownership to 67.5 percent by the year 2000, would take us to an all-time high, helping as many as 8 million American families across that threshold”.

The policy was continued after Clinton, as subprime lending to lower income groups took a major role in the housing market.  But the peak home ownership rate proved to be 69% in 2004-5.  Since then it has been sliding steadily downwards, and was back at 1995′s rate of 64% in Q4 last year.

It seems safe to assume this decline will continue.  As January’s housing start data confirmed, there is now a clear new trend, towards multi-family housing, which is now 36% of the total – double the percentage in 1995.  The BabyBoomers are moving back to the cities as they retire, and the decline in fertility rates means younger people have less reason to need a family-size home in the suburbs.

Some of these trends were obscured during the energy bubble of the past few years.  Hundreds of thousands moved to work in the oil and gas producing states, and naturally created major demand for new housing.  But now even that support is being reversed as well, as I discussed last month, as oil prices return to historical levels.