Economical Updates April 1, 2016

Starter Home Shortage

February's pending home sales report probably wiped some worry lines off the brows of industry insiders. Contract signings bounced back from a 3% drop in January, rising 3.5%. The news was particularly sweet on the heels of a dismal 7.1% decrease in existing home sales a week earlier.

In an article scarily titled "Death of the Starter Home," MarketWatch writer Daniel Goldstein said Millennials and others are struggling to find first homes they can afford. He quotes a study by San Francisco based real estate research firm Trulia which found fewer affordable starter homes than four years ago in 95 of the largest 100 markets. The change in some cases was staggering. 

Trulia defined starter as a home in the lower third of a market's valuation and affordable to those making the market's median income. The supply of such homes has dived by 74% (Portland, OR) to 88% (Salt Lake City) in 10 hot markets. Following Salt Lake were San Antonio, Austin, San Diego, Nashville, Orange County (CA), Denver, Houston, and San Francisco.

The company counted about 238,000 starters among the 860,000 homes for sale (28%) in surveyed markets, down from 425,000 (30%) of a much larger total inventory in 2012. In addition, a buyer would only have to dedicate 32% of household income to buy a 2012 starter compared to 37% today.

Trulia gave two primary reasons for the shortage; investor purchases at foreclosure of what could have served as starters but are now rentals, and the large portion of lower-priced (relative to higher priced) homes that are still underwater and thus hard for owners to sell.

The next hike in the fed funds rate is again a moving target. Last week the San Francisco Fed President, John Williams, said that April or June, referring to upcoming meetings of the Federal Open Market Committee (FOMC) "would definitely be potential times to have an increase in interest rates." That was echoed later by two other presidents, James Bullard of St. Louis who pointed to April and Philadelphia's Patrick Harker who said he would support a rate increase "soon."

Then in a speech on Tuesday, Fed Chair Janet Yellen said the U.S. economy was doing well, especially vis-à-vis the job market and consumer spending but she wasn't nearly so upbeat about the global economy, expressing particular concern about China and oil. According to CNN Money, "Her remarks made an interest rate hike at the Fed's next meeting in April seem unlikely." Whether markets have greater trust in Yellen or merely because she spoke last, Wall Street rallied and the S&P turned positive for the year.