Over the last few months, a number of national real estate reports have generated mixed results, and as I recently detailed, homebuilder stocks have thus been stuck in neutral. But in the past two weeks it seems as if the homebuilders have slid from neutral gear into reverse, as earnings reports from industry leaders like D.R. Horton (DHI) have failed to meet analyst expectations.
The 20-city Case-Shiller index report out this week showed a 9.3% increase overall from a year ago, but that was down from 10.8% the previous month, the first time we have seen that in many months. In addition, there was a 1.1% drop in the pending sales numbers, and pending home sales have declined each and every month in 2014.
So what’s going on? Has the real estate market reached a peak, and if so what are the reasons, and what is likely to happen next?
The No. 1 problem for the real estate industry today is the lack of first-time homebuyers, particularly among the Millennial generation (roughly ages 18-32). First-time homebuyers currently make up only about 27% of all real estate purchases, a historically low figure that in past years was as high as 40%.
In years past, previous generations would finish college by 22 or 23, establish their first career jobs by the mid 20’s, begin to marry and have babies by 27 or 28, and start looking for their first home before age 30.
But many among the Millennial generation appear to be frozen in time and unable to achieve the usual demographic trends of previous generations. Burdened with debt from student loans, car loans, and credit card misadventures, this is a generation that is unable to save any funds for real estate down payments and closing costs.
Furthermore, their debt-to-income ratios are too high to qualify for mortgages, and too many are still only working part time, or in low-paying jobs. Just filling up with gas once a week at $3.60 per gallon puts a large dent in their paychecks. Lenders simply will not touch them for fear of rising defaults down the road.
The problem goes deeper than that, though…