Why is the Housing Market Showing Little Growth?

Whether you blame the irresponsible lending habits of banks (NYSE:XLF) or simply a naturally-occurring housing bubble (NYSE:IYR), the likes of which we see every couple decades, there’s no debating that the housing market in the U.S. has taken a nosedive since 2007. At the end of last year, housing starts (NYSE:XHB) were 72% below the average yearly trend. Housing prices are in the gutter as more people are selling than buying. But ultimately the recession will resolve itself and the housing market will improve, right? Wrong.

One of the main reasons the economy has been so slow to recover is the stagnant housing market. In 2008, household liabilities were 130% of disposable income. That number has since dropped to 113% as people de-leverage. De-leveraging consists of people paying down loans with money they normally would have tagged as “disposable income”, money that would have been pumped into the economy through purchases that Americans are no longer making. The point of de-leveraging is to insulate against economic downturn, but in this case, it has helped to cause one.

Related Hot Feature: 3 Reasons the US Economic Recovery will be Different from Japan.

Not only has de-leveraging taken money out of the economy in general, but the housing market (NYSE:IYR) in particular. Many people are too in debt for their current homes to consider moving, especially when they would likely have to sell the house for less than they bought the home for, or even less than they still owe on the mortgage. Others are wary about buying new homes and taking out mortgages until the economy rights itself. Thus the mortgage crisis and housing boom have created the recession and the poor housing market, with the recession and poor housing market cyclically working against improvement in either.

While the weak housing market (NYSE:IYR) is perpetuating the recession, so too does the recession keep the housing market down. Unemployment is high and jobs are scarce, even those requiring skilled workers. One reason homes have flooded the market is because of the sheer volume of foreclosed homes being put up for sale at reduced prices. Millions of people have lost their homes since the recession because they defaulted on their mortgage payments. Many of these people have taken severe cuts to their household incomes and can no longer afford to buy a home, which means the pre-existing market for homes has declined.

Unfortunately, the population is not growing fast enough to fill this gap as well as create demand for new housing. Because of the poor economic climate, many 20-somethings who, in another time, would have been establishing their own households, are instead living with their parents because they are unable to find good-paying jobs. Even immigration has declined, and with low birth rates unable to sustain growth and the baby boomers growing older, the U.S. has relied on immigration for population growth for some time now.

For the housing market (NYSE:IYR) to improve, demand will have to increase significantly. Either the U.S. will have to change immigration policies, the recession will have to find some way to improve ahead of the housing market in order to create demand, or people will have to get busy making more babies…but that could take a while as we await their maturation into well-paid, home-buying adults.