Low oil prices not enough to spur new homeowners yet
March 17, 2016 /QYResearch News Center
>>Topic: New energy Industry Trending
LOW OIL PRICES NOT ENOUGH TO SPUR NEW HOMEOWNERS YET
Trends in demand and prices for oil can and do quite often influence the U.S. housing sector.
Strong oil demand and the high prices that go with it have historically led to a robust economy and job creation in oil markets throughout the country. This is particularly true for states like Texas and especially Houston, the largest metro market for new home construction. Conversely, the ripple effect of much lower oil prices as we’re seeing now can result in layoffs, rising unemployment and pressure on housing demand.
Texas’ and Houston’s more diversified economies (than was the case in the past) have so far largely countered the multi-year impact from a staggering oil sector. What’s more, the worst impact on employment and housing demand tends to lag negative oil events by at least a few years. So if history is any indication, the low oil price environment of today is not likely to manifest in a meaningful net loss of jobs and a sharply diminished willingness to buy homes soon.
What should also ostensibly be a positive is that lower oil and gasoline prices are putting more money back into the wallets of consumers. But even though they have more money to spend, consumers seem to be spending only a portion of this windfall and saving the balance. In other words, if the cumulative effect of low oil prices influences an influx of prospective first-time homebuyers entering the market, we’re not seeing it yet.
As history has demonstrated, if lower gasoline prices continue this will help stimulate demand for housing among first-time/entry-level buyers. Affordability is a key issue for these buyers and if the cost to commute is lower they can commute further out where the land is cheaper and builders can offer a more price accessible home. But the trends over the last few years are putting that theory to the test.
First-time buyers have typically accounted for almost 40% of existing home purchases in the past, according to the National Association of Realtors (NAR). In recent years, however, the ratio has been languishing in the neighborhood of 30% (32% in January 2016 and 30% average for all of 2015). Part of the reason may be that builders are focusing more on the trade-up market so far in this broader housing recovery. (The trade-up market is defined as homes that have extra and/or higher quality amenities and greater prices than starter homes.) This is the more robust segment of the market and the segment that has best matched the inventory of well located, available lots.
Part of the first-time homebuyer reticence may also be apparent within the very generation that these homebuilders are catering to, millennials. The generation by and large has shown more of a willingness to either live at home with their families or opt for the more cost-efficient apartment for the foreseeable future, with limited evidence of that changing in the near future.
This has the public builders on notice and they appear to be taking steps to change that hesitant mindset, which has seen a decline in affordability in recent years as detailed in the chart shown below. The NAR preliminary housing affordability index was 165.2 for the fourth quarter. In other words, a family earning the median income has 165.2% of the income necessary to qualify for a mortgage. While an improvement quarter over quarter and above the historic norm, the percentage is still far off the record high we saw over two years ago.
Four years into a broader economic upswing, inventory for starter homes remains fairly small with the builders focus on trade-up housing. Also, many fewer foreclosed/short sale homes (typically affordable to entry-level buyers) are currently available for sale. And investors are still an above average force competing with entry-level buyers. Since potential first-time homebuyers were still hesitant to jump into the market, builders have been unwilling to speculatively introduce considerably more homes. Nevertheless, some public builders are turning more of their attention towards opening or planning to open subdivisions in outlying communities and offering more efficient design standards to appeal to first-time homebuyers.
Whether these initiatives will entice substantially more first-time homebuyers into taking the proverbial plunge or continue to hold off remains to be seen.
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Source: thewhyforum
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