The Affordable Care Act (ACA), otherwise known as “Obamacare”, was created to give millions of uninsured Americans access to health care. But in their zeal to pass historic legislation, the designers and proponents of the law failed to consider the possible negative economic ramifications of the devilish details within the ACA, particularly as it may affect the real estate market.
Within the last 12 years, we have already witnessed the strength that housing has upon the American economy. It is no coincidence that during the period from 2001 to 2006, both the real estate market and the general economy were flourishing, with construction and other housing related jobs creating stronger GDP and an unemployment rate in 2005 below 5%. But as the accompanying chart shows, when the housing market sank after 2006, GDP growth sank along with it.
U.S. GDP Growth Rate
It is also true that the economy and the housing market have a “chicken and egg relationship” in that either one can influence the other. Therefore, anything that threatens to slow down the economy can also bring a screeching halt to the real estate market and the housing-related stocks that are directly tied to it.
Obamacare has already produced a noticeable and fearful effect among Corporate America, and it could produce another slow down or perhaps even a recession. Another recession would trigger a new wave of foreclosures, adding cheap new inventory to the real estate market, and once more depleting home values.
So what exactly is the problem with Obamacare, and why should a well-intentioned law be so negative for both the general economy and the real estate industry?
There are several reasons that Obamacare could mean trouble for the housing industry:
Work hour reductions: One of the requirements of the ACA was that businesses with 50 or more employees who work more than 30 hours a week must provide their staff with health insurance. But rather than helping more workers to obtain health care, this rule has instead prompted many companies to cut workers’ hours below 30. Additionally, many companies are suddenly discovering that having only 49 employees on staff works very well for them. The companies say that without these measures, they would have to lay off more people just to stay in business. Cutting hours and positions leads to lower salaries and higher levels of unemployment or underemployment. Unemployed and part time workers have a very difficult time qualifying for a mortgage.
Rising costs of healthcare: Millions of consumers have already lost their health insurance because of Obamacare and now have sticker shock when they try to gain new coverage through the ACA website. Media stories abound of individuals’ health care costs doubling or tripling from previous levels. If U.S. consumer begins to pay out hundreds of dollars more per month for their health insurance, it severely impacts the ability to save for down payments and loan closing costs. It’s also money they won’t have to spend in their local economies, and that could very well snowball into more layoffs and business closings.
Higher deductibles: Along with higher premiums, consumers are finding that under ACA, annual deductibles are multiplying by four or five times what they had under previous policies. The least expensive “bronze” plan has deductibles of $5,000 or more. So even those who are getting government subsidies to pay part or all of their premiums may still have to shell out thousands of dollars more for health care. One trip to the ER, or even a difficult pregnancy could wipe out a year’s worth of savings for a down payment or closing costs. Those who default on paying their medical bills could see their credit scores fall below the levels necessary to secure a mortgage for quite a while.
Older workers can’t retire: If workers in the 55 to 64 age group — who are not yet Medicare eligible — cannot afford to retire due to higher premiums and deductibles under Obamacare, then the 26 to 40 age group — which comprises the largest demographic of first-time home buyers — cannot move up the ladder or be hired from outside the company to fill those better-paying positions.
Low salary service industry jobs: Despite the October jobs report showing 204,000 new jobs created, many of those were either part-time or low-salaried service industry jobs, as higher health care premiums continue to deter companies from hiring more workers. 16% of all the jobs created in the last year were restaurant, fast food, and hotel jobs that have average salaries of less than $12 per hour. People who live on these salaries cannot afford to buy a home in many areas of the U.S., and usually have poorer credit scores and higher debt-to-income ratios than those with higher salaries.
The bottom Line
If first-time home buyers, who comprise 37% of all real estate sales, are forced to delay their purchases, the impact upon the housing market and the general economy will be huge. New home sales will be hit the hardest, as they are more expensive than re-sales or foreclosures, and are rarely purchased by investors.
As I recently pointed out, homebuilder stocks such as Lennar (LEN), KB Home (KBH), and D.R. Horton (DHI) underperformed the S&P 500 over the second half of 2013. Given the increasing economic difficulties that consumers will face under Obamacare, I would expect the same mediocre performance or worse to occur in 2014, and I would therefore suggest avoiding homebuilder stocks for now.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.