June 20, 2014 10:00 AM, EDT
US Housing Recovery Faltering
Daniel Acker/Bloomberg

The Mortgage Bankers Association on June 19 lowered its new and existing home sales forecast for the year to 5.28 million — a decrease of 4.1% that would be the first annual drop in four years.

The industry group also cut its prediction on mortgage lending volume for purchases to $751 billion, an 8.7% decline and the first retreat in three years.

Bullish forecasts in early 2014 from MBA, Fannie Mae and Freddie Mac have been sideswiped by rising home prices and an economy that isn’t producing higher paying jobs. The share of Americans who said they planned to buy a home in the next six months plunged to 4.9% last month from 7.4% at the end of 2013, the highest in records dating to 1964, according to the Conference Board, a research firm in New York.

“The big housing rally wiped itself out because prices increased too quickly for buyers to keep up,” said Richard Hastings, a consumer strategist at Global Hunter Securities in Charlotte, North Carolina, who predicted the slowdown eight months ago. “The pool of eligible new buyers is collapsing” because of stagnant incomes and lack of credit, he said.

The best-qualified homebuyers jumped into the market last year to grab near-record low mortgage rates that averaged about 3.5% after delaying their moving plans during the housing slump, said Nariman Behravesh, chief economist of IHS Inc., a research firm based in Englewood, Colorado.

 The median price of an existing home gained 11.5% last year, second only to 2005’s 12% increase, the highest on record, according to the National Association of Realtors. This year, price appreciation probably will slow to 5.6%, NAR said.

As prices climb, the ability of Americans with stagnant wages to buy homes wanes.

The median U.S. household income rose less than 1% in 2013, according to data from Sentier Research in Annapolis, Maryland. In April, the median income was $52,959. When adjusted for inflation, that’s almost 6% lower than in June 2009, which marked the beginning of the economic recovery, said Gordon Green, a Sentier partner who formerly directed the Census Bureau office that compiles wage statistics.

“Even though we’re technically in a recovery, household income is lower now than it was in the recession,” Green said. “It makes it a lot harder to buy a house.”

Three major housing forecasters — MBA and government-run mortgage financiers Freddie Mac and Fannie Mae — began the year projecting an average home-sale gain of 10% in 2014.

In May, after monthly reductions in their estimates, Fannie Mae and MBA for the first time projected an annual decline, amounting to less than 1%.

Freddie Mac this week lowered its 2014 home sales forecast 1.8% to 5.4 million — which would be the first annual drop in four years. The company also cut its prediction on mortgage lending volume for purchases 1% to $751 billion, the first annual reduction in three years.

While home purchase applications have picked up recently with the traditional home-buying season under way, they’re still 13% below last year, Freddie Mac chief economist Frank Nothaft and deputy chief economist Leonard Kiefer said in the forecast.

“For this reason, we’re lowering our overall homes sales forecast,” they said.

The pullback by the largest investors, who raised about $20 billion to purchase as many as 200,000 properties in the past two years, also has cooled the market.

With home prices up 31% since a post-bubble low in January 2012 and bargains harder to find, Blackstone Group LP has reduced its pace of buying by 70% since last year. The firm is focusing its acquisitions for rentals on five markets — Seattle, Atlanta and the Florida cities of Tampa, Orlando and Miami, Jonathan Gray, the firm’s global head of real estate, said in March.

As signs of a housing slowdown appeared early this year, economists initially blamed severe weather. The winter was the coldest in four years, and some U.S. cities had snow accumulations at near-record levels, according to Commodity Weather Group in Bethesda, Maryland.

“Winter weather explanations are valid, but they’re not endless,” said Hastings of Global Hunter. “When prices go up too much in an environment where families can’t pay them, the rally cancels itself out.”

The economy, which contracted 1% in the first quarter, is mostly generating lower-paying jobs.

In May, payrolls increased by more than 200,000 for a fourth consecutive month, the first time that’s happened since early 2000, according to the Labor Department. The number of workers in May rose to 138.5 million, surpassing the level in 2008 before the financial crisis wiped out 8.7 million jobs.

The gain was led by low-paying positions such as nursing home orderlies and temporary office jobs, both at records, according to government data.

Even with job increases, “a broader assessment of indicators suggests that underutilization in the labor market remains significant,” Federal Reserve Chair Janet Yellen said at a June 18 press conference in Washington after a meeting of the Federal Open Market Committee.

High-wage sectors haven’t rebounded. Compared with 2008, there were 1.6 million fewer people working in manufacturing in May and 340,000 fewer people working in finance, according to government data.

“The real shocker is the labor market,” said Behravesh of IHS. “We’re barely back up to where we were before the recession began. A lot of the people without good jobs are the ones who should be buying homes right now.”

Even with mortgage rates that have averaged 4.3% this year, housing affordability has eroded. In the first quarter, 66% of new and existing homes were affordable to families earning the national median income, down from 74% a year earlier, according to the National Association of Home Builders in Washington.

Economic growth this year would create additional jobs and allow more people to buy homes. The pace of growth will exceed 3% in the final three quarters of the year, according to economists surveyed by Bloomberg.

The Federal Housing Finance Agency, which oversees Freddie Mac and Fannie Mae, in May announced new rules to encourage lenders to relax credit standards. The rules are designed to reduce the risk that lenders will have to buy back soured mortgages due to underwriting errors — an issue that has kept standards tight.

The average credit score for borrowers in May who bought homes was 755 on a scale of 300 to 850, according to a report this week from Ellie Mae, a loan processor in Pleasanton, California. That compared with 756 in December, the last time it was higher.

A decade ago before the housing bubble, the average score was about 715, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

“Making credit more available is vital to the housing recovery, which is vital to the economy,” Zandi said.