Real estate agents on social media and pundits on financial channels are citing several reasons why, but all raising voices in a cacophony that agrees…a fresh housing crisis is right around the corner. Even the phrase “when is the housing market going to crash” is up over 2450% in Google searches last month.
They cite the astounding run-up in housing prices, the multiple offers on every home that comes on the market, and sometimes a macro-economic stat, like the number of FHA loans in default…all to justify a feeling.
The feeling that the parents could burst through the front door at any moment and break up the rocking party.
At the risk of upsetting teenage dreams about trashing the parents’ house with the party-of-the-century, let’s take a look at some facts about housing to see what the near future holds.
Long-Term Supply and Demand
Prices of anything follow the supply vs demand dynamic, of course.
The housing crisis of 2007 was predicated on way-too-easy access to credit – with stated income loans and easy cash-out refinances that allowed many to live beyond their means…and pay for it with a simple cash-out of their ever-rising equity.
But that was not all. The demand created by easy credit caused an over-supply of housing inventory. Either with people selling or with builders building.
That is not the case right now. Take a look at the current inventory of housing as compared to 2007:
Source: MBS Highway
At the moment there are approximately 2.7 million fewer homes on the market for sale than at the peak in 2007.
Supply is down. And part of this lack of inventory was caused by the COVID year that we are just coming out of. Anecdotally some homeowners put off selling for the simple reason that they did not want strangers, potentially infected strangers, entering their homes. So they did not sell.
And, for a time, at least, builders slowed building new homes, further reducing inventory that would otherwise have been coming out of the ground. It just seemed prudent not to have work crews on-site while we were all ‘flattening the curve’.
Building is picking back up, but building alone will not make up the inventory gap between buyers who want to buy and the number of homes that are available for them to buy.
And I have spoken to both tract builders and custom builders who are lamenting the lack of raw materials needed to purchase…along with the extreme run-up in lumber prices, up over 1000% since the beginning of lockdowns.
Source: Trading Economics
Speaking with one builder, they are telling home buyers that a lot put under contract today will have the home build and ready to move in over the next 9-14 months. Gone, for the moment, are the 4 month builds.
So, supply is tight.
I suspect that as Spring continues into Summer, and COVID lockdowns and fears fade with the ubiquity of the vaccines, that move homeowners will put their homes on the market. Inventory should, slowly, increase.
But will that increased inventory cause home prices to level or fall?
A brief look at the other side of the equation, demand, should help form a vision for the short to mid-term.
Housing Demand Going Forward
First, all the home sellers who should be putting more homes on the market also have to go somewhere.
Some, sure, are vacating housing. They are moving in with extended family or going to old folks’ homes or dying. All of that leaves a home vacant, to be filled with the next buyer.
But most are buying again, or choosing to rent, thus occupying an equal amount of housing.
And, first-time buyers are still entering the market and forming households and buying their first homes.
In fact, this is the demand that drives housing, and it is up and going higher over the next several years.
Take a look at the chart of first time home buyers, whose average age is 33 years old, who will be entering the housing fray over the next several years:
In 2006 there were just over 3 million of these first-time buyers. Today there are nearly 4 million, and that number will continue north of 4 million over the next few years.
For perspective let’s go back 33 years from 2006 to 1973. The birth rate in the US declined every year for several years. The obvious cause? Roe v Wade, which made abortion the law of the land. And birth rates fell.
Fast forward 15 years and birth rates were on the rise…and continued for the next several years.
And that brings us to today. First-time homeowners are buying what inventory there is, and will continue to increase their numbers for the next several years as inventory tries to catch up.
Supply is low. Demand is higher than in 2006 and increasing.
So, the housing market seems to be on a solid foundation. A foundation solid enough to keep building prices higher over the next few years. And, yes, that pun, bad as it is, was intended.
Interest Rates and Forbearances
But at the outset of the article, I mentioned the headlines and citations that caused feelings that a housing bust may be coming.
The most-oft cited is the simple ‘fact’ that ‘housing prices cannot continue to rise like this.’ And rather than assume a leveling-off of prices, the person citing this assumes that what goes up so quickly must, de facto, fall.
But there is another option: that home prices can simply stop rising as rapidly, but continue to rise.
“Granted,” states my semi-imaginary interlocutor. “But the millions of homes in forbearance will soon result in a tsunami of foreclosures, just like 2008 all over again…”
Sure, a lot of homeowners voluntarily put their mortgages into forbearance, which the US government allowed as part of COVID relief.
But those homeowners are back to their jobs or employed in new jobs, largely.
And they have equity, largely.
And equity is wealth, and they will protect that wealth at all costs and come out of forbearance, modify their mortgages, and begin to make payments again. Few will go into foreclosure. One family experiencing foreclosure is sad, and I know some will have not found jobs and be in dire straights and face foreclosure. Sure. But thankfully very few.
So, my all-feeling real estate debater brings out the ultimate touche: “What if interest rates rise?”
The thinking, rapidly rising interest rates will cause a lot of would-be home buyers to be priced out of the market. And, that could be true.
But let’s look at the numbers as laid out by my friend, Barry Habib, says, being quoted in John Mauldin’s recent newsletter:
“Say home prices rise 10% and wages rise only 2%. Houses are now less affordable, right? Not exactly. The key is that your house payment isn’t your entire income.
Say you are considering a home purchase and the mortgage payment will be $1,000. Your monthly income is $5,000. That’s 20% of your income, which is fairly typical.
If the home price is 10% higher and mortgage rates stay the same, the payment would go up to $1,100. If your wages rise 2%, you would be making $5,100 a month. Your income rose enough to pay for the higher-priced home. Houses can stay affordable even if wages rise more slowly than home prices. Not indefinitely so, but for a while.”
And interest rates, while they have risen considerably since last November, are just about at the end of their run higher for a while. The Federal Reserve cannot afford to let rates go higher, as that would hamper inflation, which is a goal of the Fed as the only way to control the ever-growing debt.
And, if many economists’ predictions are right, that there is an economic recession around the corner, then that will cause rates to fall further, and home prices to continue to rise; which is the most likely outcome in the short to mid-term.
Demand outweighs housing supply and will continue to for quite a while.
If you are in the market for a home; now is a good time to buy, with the caveat that one always needs to add, that it be a longer-term purchase.
Yes, you will pay more than you would have a couple of years ago for the same home.
And that home will be worth even more in 3 or five years. So, as many things in our economy are pointing to a correction, housing is not, for the moment, one of them. I would encourage you to take advantage to continue to build wealth with a real asset, a home.