Tallahassee Real Estate BlogRecently posted or modified blog posts by tag - US Housing Markethttps://www.manausa.com/blog/Copyright Manausa.com2023-11-05T10:34:20-07:00tag:manausa.com,2012-09-20:39419Robert F. Kennedy Jr. Proposes Plan To Create Housing Boom<img src="https://assets.site-static.com/userfiles/663/image/BobbyKennedy_NoBackground.png" width="275" height="268" alt="How Bobby Kennedy has promised to fix affordable housing" title="Bobby Kennedy Housing Boom" class="img_box_right" />As the torchbearer of the Kennedy legacy, Robert F. Kennedy, Jr. doesn't just bear a renowned last name; he's bringing audacious proposals to the 2024 Presidential race.
Topping his agenda? Igniting a U.S. housing boom.
But do the facts underpinning his promises hold water? In this analysis, we'll unpack Bobby Kennedy's bold claims and delve deep into their feasibility.<br /><br />Robert F. Kennedy Jr.'s Housing Initiative
Here, I address the specifics of Mr. Kennedy's housing proposal, or you can read about them below the video:
Having taken that in, let's dive deeper. Is Kennedy truly the right candidate to champion this cause? We'll dissect his proposal step by step to determine its merit.<br /><br />This Is Not An Endorsement
I want to clarify: my intention in sharing this content is not to endorse any political party or candidate. Rather, I've always championed the need for our local and national leaders to take serious, tangible action against the spiraling housing market crisis.
Kennedy's proposal provides a perspective on that topic, and whether you agree or disagree with the proposed solutions, your opinions matter to me. I sincerely encourage you to watch, read, reflect, and share your thoughts in the comments below.
Will Kennedy's plan fix housing, or is it just lip service? Together, through open dialogue, we can hope to find solutions that resonate with the majority and make a difference. Let's get started by checking on some of the facts and statements Kennedy shared in the video:
Kennedy Housing Plan Fact Check
The Kennedy Housing Plan asserts the following points, each of which we'll examine against what we have been tracking in the US housing market:
<img src="https://assets.site-static.com/userfiles/663/image/one.png" width="51" height="75" alt="1" title="1" class="img_box_left" />Monthly mortgage payments for home buyers have increased by 20% just in the last year, largely because interest rates have doubled.
We combined historical median home price data with mortgage interest rate records to assess this claim. Using a 90% LTV 30-year fixed mortgage as a basis, the graph displays the yearly percentage shifts in monthly mortgage payments:
<img src="https://assets.site-static.com/userfiles/663/image/us-median-home-price-mortgage-payment-october-2023.png" width="880" height="641" alt="Monthly mortgage payments for home buyers have increased by 20% just in the last year" title="Median home price data with mortgage interest rate records" class="img_box_center" />
CONFIRMED! In October of 2022, the median monthly mortgage payment was 75.3% higher than the median monthly mortgage payment from October of 2021. The year-over-year change has fallen below 10%, but we saw increases exceeding 20% for 20 consecutive months!
<img src="https://assets.site-static.com/userfiles/663/image/two.png" width="51" height="68" alt="2" title="2" class="img_box_left" />Since 2019, the cost of the average home has surged from $250,000 to $400,000.
Using the data from the previous graph, we find the median home price at the beginning of 2019 was $313K, it soared to $468K in the third quarter of 2022 and has since come down slightly to $416K. So our source on home prices (the US Department of Housing And Urban Development) shows home prices have grown nearly 50%.
CONFIRMED (ish)! Kennedy's numbers show 60% growth, while HUD's numbers show growth just below 50% since 2019. While I'm not comfortable with the numbers he chose to use, they do recognize that the median (or average) home price is growing far too fast to sustain affordable prices and rents.<br /><br /><img src="https://assets.site-static.com/userfiles/663/image/three.png" width="51" height="71" alt="3" title="3" class="img_box_left" />Americans are now spending a third of their income on rent, the highest ratio since such records were kept.
There is an excellent read on the topic of rent to income ratios by <a href="https://www.moodysanalytics.com/about-us/press-releases/2023-5-16-moodys-analytics-ninty-one-percent-decline-us-metros#:~:text=the%20New%20Normal-,Moody's%20Analytics%3A%20Spending%2030%25%20of%20Income%20on,Rent%20is%20the%20New%20Normal&text=New%20York%2C%20May%2016%2C%202023,report%20and%20data%20interactive%20tool." title="Spending 30% of Income on Rent is the New Normal">Moody's Analytics</a>. It confirms that there are too many "rent burdened" cities (where rent's exceed 30% of median local incomes), but it also shows improvement for renters.
REFUTED! According to Moody's, "The number of US primary metros still experiencing higher rent burdens plummeted from 49 metros down to only five, a 91% drop from Q4 2022 to Q1 2023. RTI – the percentage of gross income a median-income tenant pays for the average monthly rent – finally cooled at the beginning of 2023 after more than three years of steepening rates nationwide....With rent growth projected to hover around 2% annually, national RTI will stay mostly flat for the year (29.7%), slightly below 30% rent-burdened threshold. That is still uncomfortably elevated and only trailing behind last year’s broken record.”
Even though Kennedy's assertion of one-third of income going to rents and a record high being reached is not entirely accurate, the reality is that rents are too high to be affordable and we are very near an all-time high.
<img src="https://assets.site-static.com/userfiles/663/image/four.png" width="51" height="63" alt="4" title="4" class="img_box_left" />Investment giants such as Black Rock, State Street, and Vanguard, which collectively own 88% of the S&P 500, have ventured into the real estate sector. By 2030, projections show these corporations owning 60% of the single-family homes in our country.
This is a point that has me gravely concerned. It is patently false, and there is no realistic way these organizations can own 60% of the single-family homes in our country by 2030. According to Statista, there are roughly 144 million homes in the US, of which about 84 million are single-family homes, thus Kennedy is suggesting that these investment giants will own 50M to 55M homes by 2030.
REFUTED! The largest holder of single-family homes in the US is Invitation Homes (a subsidiary of BlackRock mentioned by Kennedy). It owns just over 80,000 homes (less than 1/10 of 1% of all US single-family homes). Institutional investors own less than 1/2 of 1% of all homes, yet Kennedy sees this growing to 60% by 2030?
Here's something to consider.
BlackRock (Invitation Homes) has been shedding homes for 3 quarters, and Invitation Homes is the big player in housing. Kennedy expects them and others to reverse course and buy nearly 9 million homes annually. Let's put that into perspective:
Annual US home sales average about 5.5 million, so these institutional investors would need to buy EVERY SINGLE LISTED HOME in EVERY US Market for the next 6 years. And then they have to acquire 56% more homes that are not on the market (perhaps they could build-to-lease an additional 3.1 million homes each year). This is ludicrous.
The narrative of institutional investors overtaking the housing market is driven by emotion, not hard data. Current figures don't sound alarm bells. These institutions aren't driving up home prices. The US is short by four to eight million homes. Institutional investors hold roughly 750,000. Even if these properties were suddenly up for sale, it'd still be a seller's market. Their holdings can't rectify the supply-demand gap.
While I've voiced concerns about institutional investors dominating housing, it's unlikely to happen by 2030. Kennedy seems to be steering attention towards these investors, possibly for political reasons. The real issue? Local governments with restrictive zoning and poor housing strategies.<br /><br /><img src="https://assets.site-static.com/userfiles/663/image/five.png" width="51" height="70" alt="5" title="5" class="img_box_left" />Kennedy vows a commitment to restore affordable home ownership for every American without adding to the national debt. His plan includes creating a federal program that backs mortgages at a 3% interest rate, financed by tax-free bonds.
This statement is exciting (as it actually suggests a solution to the home affordability crisis), but I am concerned that it is pure politician speak. The last time we saw rates at 3% (2021), home prices and rents soared at grossly unsustainable levels.
Politicians always attack the demand side when trying to fix housing, yet we have a supply-side problem. There are not enough homes for our growing population. Cheap money will only fuel more bidding wars, and soaring prices. If, instead, the solution focuses on how to add to the supply of homes, then both prices and rents will soften.
Refuted: A federal program that will lend money at 3% rates, financed by tax-free bonds, is very likely to further worsen the supply and demand imbalance.
<img src="https://assets.site-static.com/userfiles/663/image/six.png" width="51" height="66" alt="6" title="6" class="img_box_left" />
Kennedy's plan aims to create opportunities for home purchases with monthly payments of $1,000 less than now.
This point in Kennedy's housing initiative sounds like politician-speak too. But it's fairly simple to measure.
CONFIRMED: If Kennedy aims to reduce mortgage payments for homebuyers by $1000 monthly, we can quickly calculate how that would work using today's median home price and mortgage interest rate. Here's all we need:
Median Home Price: $416,100<br />Today's FNMA 30-Year Fixed Mortgage Interest Rate: 7.31%<br />New Kennedy Mortgage Interest Rate: 3%
Assuming a 90% Loan-to-value, here's what the principal and interest payments look like:
Current rate: $2,569.94<br />Kennedy rate: $1,578.86<br />Difference: $991.08
I would say that is "close enough for government work!"<br /><br /><img src="https://assets.site-static.com/userfiles/663/image/seven-good-version.png" width="51" height="68" alt="7" title="7" class="img_box_left" />Kennedy intends to amend the tax code to dissuade corporations from entering the single-family home market.
Directing attention to this seems misguided, as it diverts resources from addressing the real issue at hand. Our challenge is on the supply side, and it's not due to the small percentage of homes that institutional investors hold.
Refuted: We should focus on building more homes to counteract institutional investors. When supply surpasses demand, both prices and rents will decline. It's better to let market dynamics keep corporations in check rather than add more bureaucratic hurdles.
<img src="https://assets.site-static.com/userfiles/663/image/eight.png" width="51" height="67" alt="8" title="8" class="img_box_left" />Collaborating with local governments, we plan to revitalize empty plots and rundown homes.
Kennedy's last remark seems more like political posturing. Approximately 200,000 to 300,000 properties are condemned or demolished annually in the US. These could potentially replenish inventory after renovation, but when you factor in costs, there is little difference compared with creating new homes.
Refuted: While this observation could technically be stamped as "confirmed," it's not a game-changer. We require a strategic approach to increase affordable housing. This issue cannot be addressed with catchy one-liners. I'm skeptical about the Federal Government's capability to effectively "collaborate" with local authorities. Frankly, neither should be in the home-building business.
<br /><br />Kudos To Robert F. Kennedy, Jr.
Robert F. Kennedy Jr.'s housing initiative, bold as it is, raises eyebrows. On careful inspection, certain claims resonate with reality, while others seem distant from the actual situation on the ground. The U.S. housing crisis is complex, with multiple dynamics at play.
Though politically charged, Kennedy's attention to institutional investors and tax codes may not necessarily address the heart of the problem. The core challenge remains the dire shortage of affordable housing in the U.S., a problem that demands innovative and practical solutions. Nevertheless, I am excited that a candidate recognizes the need to fix our broken housing market.
The focus should be on bridging the housing supply gap, adopting comprehensive strategies that streamline home-building processes, strengthening property rights, and fostering collaborations that genuinely work. Rhetoric alone won't solve the housing crisis. Genuine action, backed by fact-checked data and on-the-ground realities, is the need of the hour.
As voters, it's essential to scrutinize political proposals, identify their strengths and weaknesses, and advocate for policies that genuinely address pressing national challenges. The hope is that the debate around Kennedy's proposals will stimulate more such discussions, leading to actionable solutions for America's housing conundrum.2023-10-02T03:00:00-07:002023-11-05T10:33:26-07:00Joe Manausatag:manausa.com,2012-09-20:38743Why Vacancy Rates Are the Hidden Indicator of Housing Market Health<img src="https://assets.site-static.com/userfiles/663/image/vacancy-rates-graph-housing-market-health.jpg" width="880" height="587" alt="a metric often overlooked but deeply interconnected with the state of real estate: housing vacancy rates" title="Why Vacancy Rates Are the Hidden Indicator of Housing Market Health" class="img_box_center" />Imagine shopping for a new home—whether you're aiming to buy or rent—and finding that every other house on the block is empty. Conversely, imagine a tight market where you can't even find a rental property, let alone purchase a home. What could these two extreme scenarios signify about the health of the US housing market?
The answer lies in a metric often overlooked but deeply interconnected with the state of real estate: housing vacancy rates.
What is Housing Stock?
Before delving into the crux of the issue, let's first clarify a term that I’ll be using several times throughout this post: "housing stock."
Housing stock refers to the total number of residential units available for people to occupy as their primary residence. This inventory includes everything from <a href="https://www.manausa.com/idx/search-form/" title="Search Homes For Sale Near Tallahassee">single-family homes</a> to apartment complexes, and housing stock vacancy is a key indicator of housing market health.
The Intertwining of For-Rent and For-Sale Markets
You may think that the rental and for-sale housing markets operate in isolated silos. However, the reality is far from that. These two markets are intricately woven, each affecting the other's dynamics. Understanding one without the other would be like solving a puzzle with missing pieces.
When vacancies are high, the for-rent market becomes saturated with available units. Consequently, some <a href="https://www.manausa.com/blog/tag/real-estate-investment/" title="Real Estate Investment Tips">real estate investors</a> shift excess rental units to the for-sale market in an attempt to improve cash flow. On the flip side, when vacancies are low and demand is high, investors frequently purchase for-sale units to meet this demand.
The Importance of Vacancy Rates in Rental Markets
Therefore, to get a comprehensive view of the overall housing market, it's essential to focus on vacancy rates, particularly within the rental market. A keen eye on these rates can provide invaluable insights into the likelihood of rental units transitioning into the for-sale market and vice versa.<br /><br />
To understand the prevailing trends, let's look at some current data.
Growth Rate And Vacancy Rate
The graph below features two key data sets for your consideration. The annual percentage growth of the housing stock is represented in blue, while the year-round vacancy rate is depicted in red. To help you quickly identify overall trends, a dashed line in the corresponding color indicates the average for each metric. Also, I'd like to thank Andrew Jobst (<a href="https://twitter.com/ajobst/status/1692598838953951540" title="Andrew Jobst on Twitter">@ajobst</a>) for his detailed tweet on August 18 that inspired me to write this post.
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-stock-growth-vacancy-rates.jpg" width="880" height="641" alt="Graph reveals the growth rate in new homes plus the overall vacancy rate of homes since 1965" title="US Housing Growth And Vacancy Rates" class="img_box_center" />
While the crux of this article concentrates on vacancy rates, it's essential to briefly address the issue of housing stock growth, as depicted by the blue dashed line on the graph.
Since 2008, the rate of housing unit expansion has markedly decelerated, leading to a scarcity of homes. The consequences are evident across the majority of U.S. cities:
Skyrocketing Home Prices
Escalating Rental Costs
Increasing Rates of Homelessness
The data underscores the urgent need to accelerate home construction beyond the pace set over the past 15 years.<br /><br />
Vacancy Rates Reach All-Time Low
Turning our attention to recent vacancy rates, we observe a low point three years ago when rates dipped under 3.6%. Since then, they've rebounded slightly to just over 4%. While a casual glance at historical data might suggest that today's rates are akin to those of the 1970s and early 1980s, such a comparison would be misleading.
It's important to note that the data we're examining comes from the U.S. Census Bureau, which has revised its measurement methodology multiple times over the years. These changes have expanded the scope to include various categories of vacant units, such as mobile homes and dilapidated properties, which were not part of the dataset in earlier decades.
Therefore, today's figures encompass a broader range of housing types than those captured when vacancy rates were this low. It's also crucial to highlight the significant contrast between today's vacancy rates and those observed during the housing bubble years.
Calculating The Year-Round Vacancy Rate
Upon close inspection of the graph's legend, you'll notice the inclusion of detailed titles.
<img src="https://assets.site-static.com/userfiles/663/image/housing-stock-defined.jpg" width="880" height="170" alt="Upon close inspection of the graph's legend, you'll notice the inclusion of detailed titles" title="Housing Stock Defined" class="img_box_center" />
This specificity arises from the method used to measure the vacancy rate, where Census totals have been adjusted by omitting certain categories. I recognize that this exclusion may raise questions among some readers, so allow me to clarify the rationale behind this approach.
Recall that our primary focus is on understanding the deterioration of home affordability. To that end, we've characterized housing stock as follows:
Housing stock encompasses the total number of residential units available for individuals seeking a primary residence. This includes a wide range of accommodations, from single-family homes to multi-unit apartment complexes, and serves as a critical indicator of the housing market's overall health.
The U.S. Census Bureau's dataset contains several categories that are not pertinent to our study, as they neither accommodate individuals searching for a primary residence nor provide options for the homeless:
Seasonal - Seasonal properties refer to housing units that are used or intended for use only during certain seasons of the year, for weekends, or for other occasional uses. These could include <a href="https://www.manausa.com/property/1689-st-georges-ct-east-point-fl-32328/pid-22352288/" title="Affordable Vacation Homes Florida">vacation homes</a>, ski lodges, summer cottages, or other similar property types. Seasonal homes are not the primary, year-round residences of their owners.
Held Off-Market: Occasional Use - Occasional Use properties refer to housing units that are not the primary residences of their owners or renters and are used only occasionally. These might include weekend homes, or units used for short stays but not on a regular, year-round basis. Unlike "seasonal" units, which are intended for use during specific seasons (like summer vacation homes or winter ski lodges), "occasional use" units may not have a season-specific purpose. These "Occasional Use" units are generally included in the "Year-round vacant/Held off market" category of the housing inventory, similar to "URE" (Usual Residence Elsewhere) and "seasonal" categories. The reason is that these units are not actively available for rent or sale to the general public, even though they are part of the overall housing stock.
Held Off-Market: Usual Residence Elsewhere - This year-round vacant/held off-market category accounts for vacant housing units because the owner or renter has their usual residence at another location. Such units could be secondary homes, vacation homes, or other properties that are not the owner's or renter's primary residence. Because these units are not available for rent or sale, they are classified as "held off market.
Held Off-Market: Other - The "other" category typically refers to housing units that are not currently available for sale or rent but also don't fall neatly into the more specific "Held Off-Market" subcategories like "Usual Residence Elsewhere (URE)," "seasonal," or "occasional use." The "Other" category can serve as a catch-all for various situations where a property is kept off the active housing market for reasons not captured by the more specific classifications. For example, this could include units undergoing long-term renovations, units that are part of an estate and awaiting legal resolution, units owned by organizations for future use, or units kept vacant for unspecified or miscellaneous reasons. Since the "Held Off-Market: Other" category can be broad and include a range of situations, it's often used as a fallback for any units that are not actively available for rent or sale but also don't fit into the other "Held Off-Market" subcategories.
In sum, the low vacancy rates we are witnessing today present a nuanced picture that defies a simple comparison with past decades. Adjustments in the Census Bureau's methodology and the complexity of the modern housing landscape make today's rates notably lower than those of earlier years.
Given our focus on the <a href="https://www.manausa.com/blog/us-home-affordability-crisis/" title="Home Affordability Crisis Explained">deterioration of home affordability</a>, these low vacancy rates—reflecting a limited supply of homes for primary residency—are a stark indicator of the urgency with which we must address the nation's housing challenges. The scarcity of available housing options puts pressure on prices and limits choices for individuals seeking a place to call home, further emphasizing the need for comprehensive housing policy reforms.<br /><br />We Need To Build More Homes
In summary, the core issue at hand boils down to a fundamental mismatch between supply and demand. Over fifteen years ago, governmental efforts to suppress mortgage lending led to a significant slowdown in home construction. When demand eventually rebounded, <a href="https://www.manausa.com/blog/homes-are-too-cheap-to-build-new-homes/" title="We Need To Build More Homes">the industry could not build affordable homes</a> at a pace that could satisfy this resurgent interest. This has resulted in the current housing affordability crisis that plagues many of America's metropolitan areas today.
The most viable long-term solution to this pressing issue is building more homes. Elected officials must hear from their constituents that the only effective way to rectify this growing home affordability epidemic is through proactive housing policy reforms to increase supply.
How Many Homes Are Needed?
Undoubtedly, the United States faces a housing shortage that doesn't align with the needs of its expanding population. While it's true that population growth has decelerated, it's also important to remember that hundreds of thousands of existing homes are demolished every year. These factors compel us to keep pace with population growth and replace the housing stock lost to demolition. So, what is the real magnitude of homes needed in the country?
Estimates of the housing deficit vary widely, ranging from as low as 3 million units to a staggering 8.5 million. Freddie Mac's recent estimate suggests a shortfall of approximately 3.8 million housing units for rent and sale. However, the graph in today's article, which is based on Census Bureau data, paints a darker picture.
Between 1965 and 2008, the average housing stock growth rate stood at 1.66%. In contrast, from 2009 through the second quarter of 2023, this growth rate plummeted to just 0.82%. That's a reduction of over half! Based on Census Bureau data, approximately 14.7 million new homes have been added since 2008, net of demolitions. This indicates a staggering shortfall of over 15 million homes. Even if we adjust for the slowing pace of population growth, the deficit is unlikely to be as low as the 3.8 million homes suggested by other estimates.
The shortage is palpable in both the housing-for-sale and rental markets, driving home affordability to alarming levels that many of us never anticipated.<br /><br />It's Time To Make Your Voice Heard
Contact your local elected officials and let them know that we, as a community, demand more homes to be built. The stability of our cities and the future of home affordability depend on immediate and decisive action.
2023-09-04T03:00:00-07:002023-09-04T07:19:08-07:00Joe Manausatag:manausa.com,2012-09-20:36813What Happens If Homes Are Too Cheap To Build New Homes?<img src="https://assets.site-static.com/userfiles/663/image/existing-homes-are-too-cheap-to-build-new-homes.jpg" width="880" height="587" alt="We've seen a mounting paradox in US housing markets in recent years" title="What Happens If Homes Are Too Cheap To Build New Homes?" class="img_box_center" style="display: block; margin-left: auto; margin-right: auto;" />
We've seen a mounting paradox in US housing markets in recent years. Demand for homes remains very strong, yet supply continues to lag dramatically.
It's as if we're stuck in an ever-growing line at the Golden Corral buffet, but the kitchen can't keep up with the orders.
On the surface, this peculiar situation defies the basic principles of economics and leaves us grappling with a compelling question: "What happens if homes are too cheap to build new homes? " I would like to add that this is a question first posed by <a href="https://kevinerdmann.substack.com/" title="Enlightened View Of The US Housing Market">Keven Erdmann</a>, a senior affiliated scholar at the Mercatus Center at George Mason University.
I suspect, at this point, you might be thinking, "Are you crazy? Home prices are soaring; they are not cheap! " And if you are, you are correct. But if you study history, then you know that home prices have steadily risen for the past 130 years. Of course, all goods and services have inflated prices over the past. So get used to it because home prices today, though unaffordable, are cheap compared to future home prices!
As counterintuitive as it may sound, the question of whether it is too cheap to build rings alarm bells for economists, policymakers, and builders alike. If we unwrap this conundrum, we find a much deeper, more complex issue at its core – one that strikes at the heart of our society and could potentially reshape how we perceive and approach housing in the future.
But before we delve into the nitty-gritty of this enigma, let's take a moment to put our detective hats on. Let's unmask the villain in our story: the strange economic monster that appears to be eating away at the housing market's foundations. Our journey will clarify why this is happening, illuminate potential repercussions, and explore how we might tame this unruly beast.
We invite you to join us as we delve deeper into this compelling examination of an unlikely conundrum: the potential collapse of housing affordability due to homes remaining too inexpensive to warrant new construction. This is not a theoretical scenario but a genuine challenge in today's market. The current situation presents a paradox where homes that are unaffordable for the majority of prospective buyers are, in fact, priced too low to incentivize builders to compete in the market.
The necessity for understanding this paradox cannot be overstated. The unfolding narrative has profound implications for a broad spectrum of stakeholders, including builders, homebuyers, sellers, policymakers, and every individual aspiring to own a home.
<br /><br />Understanding Real Estate Economics
The dynamics of real estate markets can appear complex and intricate, but at their core, they function based on the fundamental economic principles of <a href="https://www.manausa.com/blog/supply-and-demand-in-real-estate-2022/" title="Why It's Always About Supply And Demand In Real Estate">supply and demand</a>.
Let's start with the basics: Supply refers to the total number of homes available for sale, including new constructions and existing homes, while demand refers to the number of people willing and able to purchase these homes. The interplay between these two forces helps determine the price of real estate in a particular market.
When demand increases due to population growth, economic prosperity, or other favorable conditions, prices rise as more people compete for the available homes. Conversely, if supply increases while demand remains constant, prices typically decline as more homes compete for a stable pool of buyers.
However, the real estate market is in a state of constant flux, with supply and demand continually adjusting in response to countless factors. For instance, rising prices may encourage builders to construct more homes, thereby increasing the supply. Similarly, higher prices may deter some potential buyers, thereby decreasing demand. Over time, these adjustments can lead to a state of equilibrium where supply matches demand and prices stabilize.
Equilibrium in housing prices doesn't mean they will stop fluctuating altogether. Prices will continue to respond to changes in market conditions, but these shifts will be more moderate and sustainable. When the housing market is in equilibrium, it's generally easier for individuals and families to plan for the future, knowing that they're not likely to be caught off guard by sudden, dramatic changes in home prices.
However, achieving this state of equilibrium is not always straightforward. Numerous variables, from construction costs and interest rates to government intervention and broader economic trends, can influence the housing market's balance between supply and demand. Understanding these dynamics is critical when addressing why builders might not be constructing new homes, even when demand is high and prices are, ostensibly, too low.<br /><br />The Paradox of High Demand but Low Construction
At first glance, a booming real estate market, marked by high demand and soaring prices, should incentivize builders to construct new homes. After all, more buyers vying for properties should equate to brisk business for builders. Yet, in reality, we find an intriguing paradox where high demand does not always result in an increased supply of homes. What could be causing this disconnect?
The answer largely boils down to the financial feasibility of construction projects. Builders are, after all, running businesses. They invest resources – time, money, and labor – into constructing homes with the expectation of selling them at a profit. If the costs of building new homes surpass the potential selling prices, builders may hesitate to embark on new projects, regardless of how high the demand might be.
Several key factors can drive up the costs of construction. These include:
Land Costs: In many high-demand areas, the price of land can be prohibitively high. The land price often comprises a significant portion of the total cost of constructing a new home. With the rise of Nimbyism over the past twenty years, land costs have gotten out of control. It's not necessarily the acquisition cost that is the problem; rather, it is the development costs that <a href="https://www.manausa.com/blog/are-you-a-nimby-or-a-yimby/" title="Are you a NIMBY or a YIMBY?">Nimbyism</a> has driven beyond our reach.
Material and Labor Costs: Building materials and labor prices are subject to fluctuations in global and local markets. Events such as trade disputes, natural disasters, and pandemics can cause sudden surges in these costs. What I rarely see mentioned in other real estate reports is the soaring rate at which the minimum wage grows. At last count, 30 states and Washington D.C. have minimum wages above the federal minimum wage, blowing away the historical rate of change the market would typically endure.
Regulatory Costs: These include permit fees, impact fees, and costs related to meeting building codes and regulations. These costs can make up a sizable percentage of the total construction cost in some areas.
Financing Costs: Builders often need to borrow money to finance their projects. When <a href="https://www.manausa.com/blog/the-impact-of-interest-rates-on-the-housing-market/" title="The Impact of Interest Rates on the Housing Market">interest rates</a> are high, the cost of borrowing increases, making construction projects less financially feasible.
Risk and Profit Margins: Builders need to account for potential risks such as market downturns, project delays, cost overruns, and more. They also need to ensure that potential profits justify the risks they take.
When these costs exceed the price builders can reasonably expect to get from selling a new home, it discourages new construction. This is the crux of the paradox we're exploring: even in a high-demand market, homes may effectively be too cheap – that is, their selling price may be too low compared to the cost of building – to spur the construction of new homes. So yes, homes are unaffordable today, but compared to the cost of building more, they are too cheap!<br /><br />Impacts of Low-Priced Homes on the Market
When the market price of homes is low relative to these construction costs, it can ripple affect the entire housing market. As we've discussed, it discourages the construction of new homes, exacerbating supply constraints and potentially leading to a further increase in home prices.
Low-priced homes can also affect the quality of new housing. Builders looking to maintain profitability may resort to using cheaper materials or cutting corners, which can lead to a decline in the overall quality and sustainability of housing.
Furthermore, a market dominated by a <a href="https://www.manausa.com/blog/building-permits-january-2022/" title="Building Permits Provide Great Picture Of The Housing Problem">low inventory of homes</a> may attract investors looking for profits from rapid appreciation rather than long-term residents, leading to higher rental rates and housing instability.
In short, while relatively lower existing home prices may seem like a boon for potential buyers, they can lead to many unintended consequences that can destabilize the housing market and have far-reaching impacts on the community.<br /><br />Effects on Existing Homeowners and Quality of Housing
When the price of new homes is significantly higher than existing home prices, it not only impacts the builders and future homeowners but also profoundly affects existing homeowners. They become trapped in their current homes as the cost of <a href="https://www.manausa.com/blog/move-up-market-real-estate/" title="What Does The Ideal Move-Up Market Look Like In Real Estate?">moving up</a> has gone through the roof, and the cost of moving down rarely yields a discount.
A lack of future-move options can inhibit homeowners from selling their properties. Knowing they have no affordable options for a next home could deter potential sellers, further constricting the supply of available homes.
The quality of new housing can also be compromised. To maintain profitability, builders may use lower-cost, potentially lower-quality materials or reduce the size and features of new homes. This cost-cutting could lead to a decline in the overall housing standards, affecting the living conditions of new homeowners and potentially increasing the need for repairs and maintenance in the long run.<br /><br />The Role of Government and Policy
Government policy plays a pivotal role in shaping the housing market. Regulations influence the cost of construction, the availability of land, the price of homes, and the overall demand and supply dynamics.
For instance, building codes and zoning laws dictate what can be built and where. While many believe these regulations are essential for ensuring safety and planning sustainable communities, they also add to the cost of construction. High regulatory costs make building new homes less profitable, particularly in a low-price market. Worse are the communities with strict zoning laws that fail to follow them due to pressure from <a href="https://www.manausa.com/blog/are-you-a-nimby-or-a-yimby/" title="Are you a NIMBY or a YIMBY?">the Nimby movement</a>.
On the other hand, governments can also implement policies to incentivize home construction. This might include tax credits for builders, subsidies for using certain materials or building techniques or streamlining the permit process to reduce delays and costs.
Monetary policy, such as setting interest rates, also plays a significant role in the housing market. Lower interest rates can make borrowing cheaper for both builders and buyers, but there is ample historical evidence to suggest that interest rates do not have a long-term impact on the supply and demand for homes.
Government policy can also affect the demand side of the equation. For example, tax deductions for mortgage interest can make home-buying more attractive.
The role of government and policy in addressing the paradox of a high-demand, low-construction, and low-price housing market cannot be understated. Balancing the needs of builders, homeowners, and potential buyers requires a nuanced understanding of the housing market and thoughtful, proactive policymaking.<br /><br />Influence of Local and National Policies on Building Feasibility
<a href="https://www.manausa.com/blog/obama-housing-czar/"><img src="https://www.manausa.com/uploads/imagefiles/Czar-Joseph-I.png" width="222" height="299" padding-left="15px" alt="Why The Feds Should Make Joe The Federal Housing Czar" title="Do We Need A Federal Housing Czar?" style="float: right; padding-left: 15px;" /></a>Policies at both local and national levels can profoundly influence the feasibility of constructing new homes. They can impact all the elements of construction costs we discussed earlier, from land and labor costs to financing and regulatory expenses.
Zoning laws and building codes, typically enforced at the local level, can directly affect the cost of building. Zoning laws dictate what can be built where impacting land availability and costs. Building codes can influence the cost of materials and labor as they set standards for safety, energy efficiency, and aesthetics that builders must adhere to.
National policies also play a crucial role. Trade policies can impact the cost of raw materials, while immigration policies can influence labor availability and costs. <a href="https://www.manausa.com/fed-funds-mortgage-interest-rates/" title="How The Fed Funds Rate Impacts Mortgage Interest Rates">Monetary policies</a>, such as interest rates set by central banks, affect builders' borrowing costs.
Exploring Potential Policy Solutions
Addressing the paradox of high demand but low construction in a low-price market requires nuanced policy interventions. Potential solutions could include:
Land Use Policies: Reforming zoning laws could help reduce land costs for building new homes. More homes could be built on the same plot of land by allowing higher-density housing in certain areas, reducing the per-unit land cost.
Streamlining Regulations: While maintaining necessary safety and sustainability standards, there could be opportunities to streamline the regulatory process, reducing delays and costs for builders.
Incentivizing Construction: Government incentives such as tax breaks, subsidies, or low-interest loans could help offset some of the construction costs, making it more profitable for builders to build new homes.
Supporting Labor Market: Policies that support the training and retention of skilled construction workers could help ensure a steady labor supply, potentially reducing labor costs over time.
Affordable Housing Programs: Governments could invest directly in the construction of affordable housing or provide incentives for builders to include affordable units in their projects.
Case Studies
Case studies from around the world can provide valuable insights into the impacts of various policies on housing markets. In the next section, we will explore a few of these case studies, examining how different jurisdictions have grappled with housing affordability and construction challenges and the policy solutions they have implemented. Through these case studies, we hope to understand better the potential pathways to addressing the paradoxical situation in our current housing market.<br /><br />Case Studies: Markets with Low-Priced Homes And Their Lessons
Several markets around the US offer instructive examples of the phenomenon we're examining: low-priced homes that don't incentivize new construction. Let's take a closer look at a few of these.
Seattle, Washington: The housing market in Seattle provides a compelling case study on this issue. Despite having one of the strongest job markets in the U.S., fueled largely by a thriving tech sector, Seattle grapples with issues related to low-priced homes and insufficient new construction. Like many other major urban centers, Seattle has faced escalating housing prices. However, a portion of the market, particularly in the city's outlying areas, still has homes priced relatively low due to factors like older housing stock and less desirable locations.
Despite strong demand, new construction in these areas has lagged behind for several reasons. High <a href="https://www.manausa.com/blog/how-much-does-new-home-construction-cost/" title="How Much Does New Home Construction Cost?">construction costs</a>, driven by increasing labor and materials costs and tight land-use regulations, have made it economically challenging for builders to embark on new projects where the potential selling price may not cover the development costs. The city has been actively addressing these issues through policy measures. Efforts such as the Housing Affordability and Livability Agenda (HALA) have been implemented to increase housing options and affordability. These measures include upzoning certain areas to increase density, providing incentives for constructing affordable housing and streamlining approval processes. While it is still a work in progress, Seattle’s experience underscores the complexities of housing markets and the role of policy in shaping outcomes. It provides a valuable case study for other cities facing similar challenges.
Austin, Texas: The city of Austin has seen a significant influx of residents due to its thriving tech scene and the appeal of its vibrant culture. This has led to a sharp increase in housing demand. However, this hasn't translated into a corresponding increase in construction, particularly in the affordable housing segment. Despite low-priced homes existing in certain areas, builders find it challenging to justify new projects due to high costs for land, materials, and labor. Strict zoning regulations further compound these issues. Austin's struggle to meet its affordable housing demand illustrates the paradox we've been discussing and highlights the importance of policy changes to stimulate construction.
Denver, Colorado: Denver's case is another interesting one. The city has experienced significant population growth in the past decade, which has led to a surge in housing demand. Nevertheless, the construction of new homes, especially affordable ones, has not kept pace. The reason is twofold: the high costs of construction, including land and materials, and stringent building regulations. Despite being undersupplied, the lower end of the market isn't attractive for builders as the prices of these homes often don't offset the high construction costs. Denver’s experience further underscores the complex interplay of market dynamics and policy decisions in the housing market.
Lessons Learned and the Consequences of Prolonged Shortage
Each of these examples illustrates different outcomes and provides lessons on the impacts of low-priced homes on the construction market. Importantly, they underscore the role of local and national policies in mitigating the impacts of such a market.
However, if the shortage of new homes persists over an extended period, the consequences can be severe. A long-term supply shortage can exacerbate affordability issues, increase income inequality, and potentially fuel a <a href="https://www.manausa.com/blog/housing-bubble-2021/" title="The Truth About The Housing Bubble">housing bubble</a>. It can also lead to overcrowding, underinvestment in housing, and substandard living conditions, impacting the quality of life and the broader socio-economic stability.
Addressing this issue with a strategic, multifaceted approach involving public policies, private sector incentives, and community engagement is essential. The goal should be to increase the number of homes being built and ensure these homes are affordable and sustainable, and contribute positively to the overall community.<br /><br />The Ramifications of a Prolonged Shortage
The sustainability and equilibrium of the housing market are critical to economic and societal stability. When a housing shortage continues unchecked for an extended period, the repercussions can be severe and widespread, manifesting in multiple forms.
Escalation in Housing Costs: A pronounced shortfall in housing supply amidst strong demand can lead to a steep rise in home prices and rental costs. This rise exacerbates the affordability crisis, pushing homeownership further out of reach for many, especially lower- and middle-income families.
Deepening Economic Inequality: The escalating housing costs and a lack of supply may also exacerbate economic inequality. Those who own properties can enjoy capital appreciation, further increasing their wealth. On the other hand, those priced out of the market miss out on this opportunity, which can widen the wealth gap.
Macroeconomic Instability: The housing sector is interconnected with the broader economy in multiple ways. A significant imbalance in the housing market can lead to broader economic disruptions, including potential housing bubbles and recessions.
Social Disparities and Impact on Quality of Life: On a societal level, the persistent shortage of affordable homes has led to a rise in homelessness, overcrowded living conditions, and a decline in overall living standards. It can also contribute to a growth in socio-economic segregation, with low-income households increasingly concentrated in less desirable areas.
If the Situation Remains Unresolved
The long-term implications for the economy and society could be significant if this situation of high demand and low construction persists without resolution.
Stunted Economic Growth: Continuing this paradox could lead to an overall slowdown in economic activity. The construction industry is a significant job creator and contributor to GDP. A sustained decline in homebuilding could lead to job losses, decreased consumer spending, and stunted economic growth.
Societal Strains: Over time, the lack of <a href="https://www.manausa.com/blog/what-you-dont-know-about-home-prices-might-hurt-you/" title="What You Don't Know About Home Prices Might Hurt You">affordable housing</a> options could significantly increase social challenges. Housing instability can lead to poorer health outcomes, lower educational attainment, and higher stress and anxiety levels in affected populations.
Disruption of Community Fabric: The social fabric of communities can also be negatively impacted. Gentrification may force long-term residents out of their neighborhoods, causing a loss of community cohesion and continuity.
Resolving the paradox of high demand but low construction in today's market is not just a housing issue but a broader economic and social imperative. It calls for thoughtful and coordinated solutions that span various stakeholders, from policymakers and builders to financial institutions and community organizations. These solutions must focus on increasing the supply of homes and ensuring affordability and accessibility for all segments of society.<br /><br />Resolving The Paradox
This article examined the intriguing paradox of high housing demand juxtaposed with low construction activity, primarily due to low existing home prices. This is a situation that transcends the realm of mere economic curiosity. It is a predicament that has profound implications for builders, potential homebuyers, policymakers, and society.
We've delved into the complexities of the real estate market, examining the fundamental principles of supply and demand and how these forces interact to shape the housing landscape. We've explored the unique situation where high demand doesn't necessarily spur increased construction, especially when the price of existing homes falls well below the cost of building new ones.
This exploration led us to understand the cost dynamics involved in homebuilding, covering elements like labor, materials, land, and regulatory costs. We've seen how a lower market price for homes can disincentivize builders from embarking on new projects, leading to a potential shortage in housing supply.
The ramifications of such a shortage, if prolonged, are far-reaching. From escalating housing costs and increasing economic inequality to macroeconomic instability and social disparities, the ripple effects of this paradox touch every corner of our society.
If this situation remains unresolved, the long-term implications could be severe, including stunted economic growth, social strains, and disruption of the community fabric.
Reflecting on the central question - "What happens if homes are too cheap to build new homes? " - it becomes clear that the potential consequences extend beyond real estate and housing markets. The stability and prosperity of our society are deeply intertwined with the balance and robustness of our housing market.
Addressing this issue is not a simple task. It requires thoughtful, targeted, and coordinated strategies from various stakeholders. It's about increasing <a href="https://www.manausa.com/blog/new-construction-bottleneck-housing-bubble/" title="Will The New Construction Bottleneck Cause A New Housing Bubble?">the volume of houses being built</a> and ensuring the right houses - affordable, sustainable, quality homes - are being built in the right places.
As we continue to grapple with this complex issue, we must remember that the ultimate goal of housing policy should be to ensure everyone has access to a safe, decent, and affordable place to call home. Achieving this will resolve our present paradox and contribute to a more equitable and sustainable society.2023-06-12T03:00:00-07:002023-06-21T09:16:14-07:00Joe Manausatag:manausa.com,2012-09-20:35486Redfin Report: First Yearly Dip in Home Prices<img src="https://assets.site-static.com/userfiles/663/image/redfin-housing-market-report-may-2023.jpg.jpg" width="880" height="587" alt="Housing market update powered by data from Redfin" title="Redfin Housing Market Update" class="img_box_center" />
Step into the world of real estate, and you'll find a market that's as enigmatic as a Van Gogh painting.
Some view it as a bleak landscape where only the wealthy can find a place to call their own, while others see it as a vibrant landscape of opportunity. Regardless of your viewpoint, the latest Redfin Housing Market update provides a unique perspective on current affairs.
Unlike the usual reports from Zillow or MLS, this update draws its insights from one of the larger real estate portals on the web. It's a view of the market that's as rich and colorful as any of Van Gogh's masterpieces.<br /><br />Median Home Sales Price Breaks 10-Year Run
Our first graph in today's report shows that something occurred over the past two months that has not happened in the past ten years.
<img src="https://assets.site-static.com/userfiles/663/image/redfin-may-2023-median-home-price.jpg" width="880" height="641" alt="Recent Redfin Graph of median home price" title="Redfin Median Home Sales Price" class="img_box_center" />
This graph plots the median home price change each month.
In March, the median price of homes sold in the United States dropped to $400,528, a 3.3% decline from the previous year. This is the largest year-over-year decrease since 2012. In February, the median home sale price decreased by 1.2% from the previous year, marking the first annual decline since 2012.
Home prices dropped significantly in cities that saw a surge in demand during the pandemic, such as Austin and San Jose. Meanwhile, more affordable areas continued to experience price increases.
The demand for homes decreased due to high mortgage rates and limited inventory, resulting in the lowest pending home sales since the pandemic began. Homeowners also held onto their low mortgage rates, causing new listings to hit a pandemic-era low. As a result, bidding wars continued in many markets due to the lack of available homes for sale.
Redfin also included a statement about a dubious real estate statistic:
Just 28.5% of U.S. homes sold for more than their final list price in March, down from 54.1% a year earlier.
If you read my recent article on misleading housing statistics, you'll understand that the structure of MLS systems makes it impossible to measure the sales price to list price ratio accurately. Therefore, Redfin's reported statistic is fabricated and unreliable.<br /><br />Median Home Price Moving Higher?
When we adjust our graph of the median home price to monthly values in a few key metro areas (as well as the national plot), we find that there is a recent rise at the US level and most large metropolitan areas too.
<img src="https://assets.site-static.com/userfiles/663/image/median-home-price-annually-redfin-may-2023.jpg" width="880" height="641" alt="Recent Redfin Graph of median home prices over the years" title="Redfin Median Home Sales Price Annually" class="img_box_center" />
I have boxed in the previous three months to isolate this period from all others. Unlike expectations from speculators, most markets are seeing the median move higher.
Long-time readers of the Tallahassee Real Estate Blog probably expected this move. Every year, we report that the second quarter of the year is when we see the largest gains in appreciation, as the spring buying season produces the greatest demand for homes.
This year (like in recent years), the available inventory of homes for sale is so low that buyers of all but the top third of all homes are finding themselves in bidding wars. Why? Because we have not built enough homes!<br /><br />Months Of Supply Of Homes
The way we evaluate the appropriate supply of homes for sale is to compare the average number of listings to the average number of sales. When we do the division, it provides the months' supply of homes, and the target that has been considered "balanced" is about 6 months of supply, though I believe modern home-selling methods will show us that four months is ample.
<img src="https://assets.site-static.com/userfiles/663/image/redfin-months-of-supply-of-homes-for-sale-may-2023.jpg" width="880" height="641" alt="Months of Supply of homes by Redfin May 2023" title="Redfin Month's Supply Of Homes" class="img_box_center" />
This graph shows that the US housing market is grossly undersupplied. Whether you believe the old standard of six months of supply is normal or the new standard of 4 months, either way, there are just 1.9 months of supply of homes in the US and that is why we expect home prices to continue higher.
So not the 30% to 50% decline that many YouTubers claim. Instead, we anticipate home prices to move higher. It's simple. Even with 30% fewer buyers in the market, there are not enough homes to house the growing population in the US. So if demand is so hot, why are builders not producing more homes?<br /><br />New Construction Premium Points To Higher Prices
This graph was produced from my Tallahassee data set, which allows me to be very recent with my analysis. It plots the five-year trend of the monthly median price per square foot of both new and existing homes and then calculates the difference between the two. The difference is the new construction "premium" buyers pay to get a new home.
<img src="https://assets.site-static.com/userfiles/663/image/new-construction-premium-may-2023.jpg" width="880" height="641" alt="Comparing median new construction cost to median existing home value" title="New Construction Premium" class="img_box_center" />
This graph starts with data from 2003 and shows the new construction premium trend was below 10% until after 2011, and then the cost of construction moved higher while the cost of existing homes declined. Builders shut production down as they could not compete with the existing homes market.
Even as home prices recovered, builder costs remained well above the existing homes market, peaking at more than 51% in 2016. So you have to wonder, why is it so expensive to build new homes, when historically they could be produced at roughly a 10% higher cost than existing homes?
Prior to COVID, the differential was greater than today. With roughly a quarter of all States voting for minimum wage acceleration, we should not be surprised. Since 2020, wage growth and COVID-related supply disruptions have made homebuilding very expensive. We might see some relief from elevated material costs, but as one local builder pointed out, "We won't see labor costs come down. In fact, they are soaring."
Among all the graphs presented in this report, I believe that this particular graph provides the strongest evidence that home prices will continue to rise, despite the possibility of a slowing trajectory. I anticipate a pattern of jagged, intermittent increases similar to those observed in the past.
Of course, there is one other factor that is pushing up home prices, and it's one that you can help to fix.<br /><br />It is important to remember that higher labor costs have a ripple effect on material costs, including transportation. Furthermore, the cost of land is also increasing due to NIMBYism (as explained in the video above), which is making it challenging to develop new homes.
With the inventory of homes in the US failing to keep pace with population growth, the new homes entering the market will be priced much higher than before. As long as this inventory shortage persists, the upward trend in home prices is expected to continue.2023-05-15T03:00:00-07:002023-05-03T12:30:58-07:00Joe Manausatag:manausa.com,2012-09-20:36048Zillow Insights: 5 Graphs That Reveal the US Housing Market in 2023<img src="https://assets.site-static.com/userfiles/663/image/zillow-insights-graph-housing-market-5-2023.jpg" width="880" height="587" alt="Zillow has just released new data that provides valuable insights into the changes taking place in the real estate industry" title="5 Graphs That Reveal the US Housing Market in 2023" class="img_box_center" />
Are you curious about the current state of the US housing market?
Zillow has just released new data that provides valuable insights into the changes taking place in the real estate industry. But that's not all - we've got something even more exciting for you!
Our team has analyzed the data and created five graphs that go beyond Zillow's report, providing an unparalleled view of the current housing market conditions. And one of these graphs offers a unique perspective on housing market pricing that you've never seen before.
Don't miss out on this chance to stay ahead of the game and understand what's happening in the real estate world!<br /><br />
Are Home Prices Heating Up?
As of late, prices in the housing market are showing signs of a rebound, indicating that demand is returning.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-report-us-home-prices-may-2023.jpg" width="880" height="641" alt="Zillow reports the change in home prices each month across major US metropolitan areas" title="Are Home Prices Heating Up?" class="img_box_center" />
This uptick is likely due to dips in mortgage rates and alternative financing strategies becoming available. Existing home sales are negatively impacted as inventory levels are much lower than pre-pandemic levels. The low inventory levels are mainly due to existing homeowners being "trapped" in their homes with low mortgage rates, making it challenging for them to move to homes with higher mortgage rates coupled with higher home prices.
The low inventory is expected to continue influencing prices in the housing market, making it challenging for buyers to transact in the foreseeable future. Even as we move further away from the era of 3% rates, existing homeowners will eventually become less attached to their ultra-low monthly payments, and new listings will gradually fill the market again.
Unfortunately, new home construction is decreasing, so overall inventory will remain limited. As a result, prospective buyers waiting for prices to become more affordable will be sorely disappointed in the future.
A better plan for people desiring a new home includes exploring alternative financing options, such as down payment assistance or buying their rate down. Unfortunately, buyers in today's low-inventory market will have difficulty encouraging sellers to help, as sellers often deal with more than one offer on their homes.<br /><br />All Price Points Move Higher (AGAIN)
As the spring home shopping season continues, entry-level shoppers should anticipate a more challenging market.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-price-index-may-2023.jpg" width="880" height="641" alt="Entry-level shoppers heading into spring can expect a tighter market" title="Zillow Home Price Index May 2023" class="img_box_center" />
This spring shopping season, entry-level homebuyers should brace for a tighter market than those shopping for middle and upper-priced homes. In March, the bottom third of the home price distribution saw a 9.5% annual appreciation. Since last year, home values for entry-level homes have experienced the most annual appreciation in most markets.
Before the pandemic, it was typical for low-tier homes to be comparably down faster than middle and top-price-tier homes, but the pandemic accelerated that growth. This means buyers who were not ready or able to take advantage of historically low-interest rates two years ago will find themselves in a significantly more expensive market with less purchasing power. For some buyers, this means they cannot enter the market at all. For others, it means setting their sights on homes they might never have considered owning.
Top-priced homes rose by just 1.3% over the past year and appear poised to hit an annual decline. Before the housing bubble, home builders could produce new homes in all three tiers (or at least the top two tiers in most markets). But with increases in the minimum wage and inflation, builders can no longer deliver homes in the bottom tier of home prices so we must anticipate further growth in the neediest segment of the housing market.<br /><br />Home Price Growth Not Equally Distributed
When we segment the market into three home price tiers, the home affordability crisis gains some clarity.
<img src="https://assets.site-static.com/userfiles/663/image/how-home-prices-are-changing-may-2023.jpg" width="880" height="641" alt="This graph segments the market in thirds to show how home prices are changing" title="Zillow Home Price Growth Rates May 2023" class="img_box_center" />
Nationally, prices for entry-level homes have increased by 9.5% year-over-year, with Tampa, Richmond, and Charlotte seeing over 60% appreciation from pre-pandemic levels. In Tampa, I know of two recent law school graduates who are getting married and looking for a home, and they cannot find anything within their budget. If two young attorneys combining their salaries cannot afford a home, what does that tell you about housing affordability?
On the other hand, top-tier priced homes only increased by 1.3% over the past twelve months. High mortgage interest rates are equally affecting the supply of homes across all price tiers. New listings for bottom, middle, and top-tier homes are comparably down. However, middle and top-tier shoppers are experiencing fewer bidding wars compared to pre-pandemic years.<br /><br />Spring Brings Momentum to Housing Market
Though home sales are down more than 30% compared to last year, it is the time of year when we expect the highest demand from buyers.
<img src="https://assets.site-static.com/userfiles/663/image/real-estate-seasonality_graph.jpg" width="880" height="641" alt="Graph shows how active each month is for homebuyers" title="Real Estate Seasonality Graph" class="img_box_center" />
This graph shows the percentage of annual contracts by month, measuring the decision dates of buyers rather than closing dates.
The housing market experiences more activity at certain times of the year, which is referred to as "seasonality." We are currently in the most active time of the year, which typically spans from March through July. This five-month period typically sees about the same number of contracts as the seven months of August through February.
The traditional seasonal patterns in the housing market were disrupted in the previous three years due to COVID, plunging mortgage interest rates at the end of 2020 and throughout 2021, and rising interest rates in 2022 after the first quarter. It's as though there was a conspiracy working against seasonality in the housing market. Despite this, we expect to see the usual seasonal uptick in buyer activity through July in 2023.<br /><br />What Is Holding Back Home Sales?
I anticipate that there will be robust buyer activity in May 2023, but I expect the number of homes sold to be considerably less than last year. The current supply of available homes for sale is inadequate to support a significant recovery, so we are relying on homebuilders to increase inventory and bolster the market.
Unfortunately, homebuilders face the challenge of delivering homes that the market can afford. Unlike low-inventory periods in the past, the current era faces an epic disparity between the cost of new and used homes, with new homes averaging nearly double the price of existing homes.
<img src="https://assets.site-static.com/userfiles/663/image/new-home-costs-versus-existing-home-costs-april-2023.jpg" width="880" height="641" alt="The cost of new home construction is through the roof" title="New Construction Costs (versus) Existing Home Prices" class="img_box_center" />
By way of example, in Tallahassee, our median existing-home price is $255,000, while our median new home price is 93% higher at $492,000. Simply put, we need a bunch more $255K homes, but the median builder home is priced at $492K.
Understanding The Home Affordability Housing Crisis
Though the graph above was created from the Tallahassee real estate market data, it parallels what you will find in most other local US housing markets. The numbers might be a little different, but the relative difference between new and used home costs is very real.
The picture this graph paints is very clear. The average cost difference between new and used homes (measured in price per square foot, shown in blue) was typically below 10% for the thirty (30) years ending in 2011. Today, the difference is three times greater.
Higher housing prices resulted from communities making it harder to develop land for housing. To bring infrastructure up to date, communities required developers to pay for past shortcomings from previous developers, which means that current developers had to factor in additional costs to their budget. These costs extended beyond just the increased demand that new homes would place on the system.
We've also seen the largest growth in the minimum wage over the past five years (Florida saw the minimum wage grow by more than 75% in a five-year span). On top of that, the NIMBY movement challenged most new developments in the works, adding even more costs due to cancellations, disapproval, or reductions in unit density. Most US metropolitan areas have made housing unaffordable with 30 years of poor policy and poor decision-making.
The shortage of housing supply is a persistent problem that cannot be ignored. If left unaddressed, it will intensify inequality between those with access to affordable housing and those without access. Addressing this issue requires active and concerted efforts at the local level. If you want to be a part of the solution for affordable housing, it starts in your own backyard. Get active in your community and let your elected officials know that you care and you are paying attention to what they are doing.2023-05-08T03:00:00-07:002023-05-22T15:07:37-07:00Joe Manausatag:manausa.com,2012-09-20:35813The Fallacy Of Affordable Housing: Why The Focus Should Be On Building More Homes<img src="https://assets.site-static.com/userfiles/663/image/affordable-housing-focus-on-building-more-homes-apr-2023.jpg" width="880" height="587" alt="The idea of affordable housing is a noble one, but the reality is that building new low-end homes is not the solution to the housing crisis we're facing" title="The Fallacy Of Affordable Housing" class="img_box_center" />
The idea of affordable housing is noble, but the reality is that building new low-end homes is not the solution to the housing crisis we're facing.
In fact, the emphasis on affordable housing may actually be hindering progress toward a more accessible housing market for all.
In today's blog post, we'll explore why the key to solving the housing crisis isn't just about making housing affordable, but rather, it's about building more homes.<br /><br />
Affordable Housing Defined
Here is how FLHousing.org defines affordable housing:
"Affordable housing is defined in terms of the income of the people living in the home. The family must be income eligible. Income eligibility is defined in terms of area median income, adjusted for family size.
Low income describes a family at or below 80% of area median income.
The median income is determined by the Department of Housing and Urban Development (HUD) by county or Metropolitan Statistical Areas (MSAs). Median incomes are updated annually by HUD."
To put this into perspective in Tallahassee, our median family income of roughly $81,400 makes our low-income families those that earn less than $65,120. Assuming they have strong credit and little debt, they can typically buy up to about $290K. In Tallahassee, our median home price is around $256K, so in theory, all is good, right?
As we'll see with the first graph in our report, all is not good!<br /><br />The Supply Of Homes Remains Near An All-Time Low
This graph plots the real supply of existing homes for sale in the US in blue, calculates the months' supply of homes for sale in red (also known as the relative supply of homes), and then records the one-year average of the relative supply of homes for sale. Historically, market equilibrium (balanced market) is achieved when six months supply of homes exists.
<img src="https://assets.site-static.com/userfiles/663/image/us-supply-existing-homes-april-2023.jpg" width="880" height="641" alt="Number of homes for sale remains near all-time low" title="US Supply Of Existing Homes" class="img_box_center" />
The first thing that jumps out of this graph is that only 980K existing homes are for sale in the US. That is 76% fewer homes than were available in 2006 when the housing market collapsed.
When mortgage interest rates soared after the first quarter last year, many self-appointed real estate experts claimed that inventories of unsold homes would pile up and home prices would plummet. Instead, we see supply falling (nearly) in line with demand. This means the relative supply of homes has not exploded above 6.0 months of supply. Instead, it has ticked up to its current "just off the bottom" level of 2.8 months of supply.
Home sales could very well heat back up as mortgage interest rates have stabilized, and that will only put more heat on the lack of supply of homes for sale in our local housing markets. We need to build more homes.<br /><br />Why The US Is Not Building Homes
This graph explains why home construction is not happening in America. Although the data is from the Tallahassee real estate market, it reflects trends in most other US housing markets when focused on the relationship between new and resale price ratios. Tallahassee's absolute values are similar to the national average.
<img src="https://assets.site-static.com/userfiles/663/image/new-construction-premium-april-2023.jpg" width="880" height="641" alt="The additional cost of buying a new one versus a used one" title="New Construction Premium April 2023" class="img_box_center" />
This graph was designed to display the long-term cost trends for US housing to understand the additional cost a new home buyer pays when compared to an existing homebuyer.
The red line plots the five-year average of the median price per square foot of new homes, while the blue line plots the five-year average of the median price per square foot of existing homes. The gray line measures the "premium" that new home buyers pay to be the first to own a home. This gray line explains why home construction is not happening in America.
For the twenty-two (22) years ending in 2012, the difference between the cost of new and existing homes was typically just under 10%. This means that a new home that was valued at $100 per square foot in 1995 would be the same size as an existing home valued at $90 per foot. Generally speaking, speculative builders had little risk if they were building quality homes, as "brand new" was only 10% more expensive than "used."
With a relative abundance of shelter in America, the spread between new and used was pretty tight. But then the federal government got involved as it felt the need to crash the housing market. When the housing market was screaming along at warp speed in 2007, the federal government stepped in and eliminated loan opportunities for home buyers with lower credit scores.
With a mass of buyers removed from the market, builder inventory stacked up, and builders were crushed. Builders with inventory lost everything, while builders without inventory had no buyers to sell to. So they stopped building homes. The cessation of homebuilding has created a void in the US housing inventory of anywhere from 5 million to 10 million homes.
So why doesn't somebody fill the void with new homes?
Just look at the graph. The cost to build new homes soared while the value of existing homes was still reeling from the Federal Government's intervention in 2007. The ten percent differential between new and used homes reached as high as 81% in 2015, while for five years, the difference averaged over fifty percent. In other words, builders could not compete with the cheaper existing homes market, so they were cautious and did not build at historically normal rates.
The yellow arrow highlights the fact that both new and existing home values are higher today than their trajectory would have been forecast in 2005. The cost of new construction materials, buildable land, and wages have taken new construction prices through the roof. The resulting effect is that new home values are pulling up existing home values, and we'll soon be to a point where most families will no longer be able to afford a home.
As I see it, there are only a few ways to fix the housing problem in the US. We either need more shelter, we need to put more people per unit, or we need fewer people.<br /><br />Tricke Up Or Trickle Down For Housing?
Trickle-up and trickle-down economics are two different approaches to housing policy that focus on different parts of the housing market.
Trickle-down economics is based on the idea that by building more high-end homes, the increased supply will eventually decrease prices as people move into these homes and free up existing homes for lower-income buyers. Proponents of trickle-down economics believe that by increasing the supply of high-end homes, the market will eventually filter down to more affordable homes, making them more accessible to lower-income buyers.
On the other hand, trickle-up economics focuses on building more affordable housing units. Proponents of trickle-up economics believe that by increasing the supply of affordable housing units, it will help increase demand for higher-end homes as people move up the housing ladder.
So which is the likelier method of producing enough affordable homes?
It has to be trickle-down.
The cost of land, sticks, bricks, and labor have risen to where we can no longer profitably produce affordable homes. I can only imagine producing them today through government subsidies (and how could that possibly go wrong?).
We need to embrace the trickle-down solution. Every local housing market must solve this on its own (as poor local governance created the housing problem). They need to figure out the lowest price they can produce homes and then work to help developers and builders flood the market with homes at these prices and higher until the shortage of homes is solved in their market areas. This means incentivizing all forms of housing production, as the supply of housing has been ignored and caused home prices and rents to soar.
I can hear the detractors now. They will say, "Sure, build more McMansions; that won't help the homeless. All you are doing is helping the rich!"
But they are wrong. Very wrong.
Here's a simplified explanation of the trickle-down housing solution. Building more million-dollar homes than are needed will add to the supply of homes that are not needed, so million-dollar home values will begin to fall. These fallen homes will increase the supply of $900K homes, so they will fall in value and become $800K homes. 800 will become 700, and so on. The market forces of supply and demand do work when we allow them.
Ideally, homes that can be produced profitably will be the starting point, and flooding the market with those homes will create a compression zone where home appreciation stagnates and then falls. With the right amount of production, coupled with the wage inflation already in progress, we'll again see the homes we once considered affordable become so again.
The housing problem will not just go away on its own, and the supply shortage will continue to increase the imbalance between the "haves" and "have-nots." We need to work aggressively to solve this national problem, but the work will be required at the local level. Keep this in mind when elections roll around, and you are wondering which candidate deserves your vote. The one that campaigns to fix housing will certainly gain my attention.2023-04-24T03:00:00-07:002023-11-05T10:34:20-07:00Joe Manausatag:manausa.com,2012-09-20:35629Behind the Headlines: Unpacking the Data On Foreclosures And Mortgage Delinquencies<img src="https://assets.site-static.com/userfiles/663/image/foreclosures-forbearance-mortgage-market-update-april-2023.jpg" width="880" height="587" alt="Behind the Headlines: Unpacking the Data On Foreclosures And Mortgage Delinquencies" title="Data On Foreclosures And Mortgage Delinquencies" class="img_box_center" />
Are you curious about what's really going on with foreclosures and loans in forbearance? Worried about the next housing crash?
With sensational headlines about foreclosures and interest rates dominating the news cycle, it can be tough to get an accurate picture of the state of the housing industry. That's why I turned to the Black Knight Mortgage Monitor, the gold standard for analyzing the US mortgage market's strength.
In this comprehensive report, you'll discover the latest trends in home prices, loans in forbearance, and yes – even the potential for a foreclosure explosion. So if you're ready to cut through the noise and get a clear understanding of the mortgage market, keep reading – because the insights in this report are not to be missed.<br /><br />
Black Knight Mortgage Report Overview
In February, serious delinquencies improved nationally, with a 17K decrease and 45 states reporting reduced volumes.
<img src="https://assets.site-static.com/userfiles/663/image/february-overview-stats-apr-2023.jpg" width="880" height="641" alt="How is the mortgage market?" title="Black Knight Mortgage Report Overview" class="img_box_center" />
In February, a 2% increase in the delinquency rate was caused by a rise in early-stage delinquencies, while serious delinquencies continued to decline. Foreclosure starts fell to 29K, ending a four-month upward trend. 5.1% of serious delinquencies began foreclosure actions. Prepayment activity increased slightly with purchases. The single-month mortality rate of .35% remains close to record lows.<br /><br />National Delinquency Rate
The national delinquency rate refers to the percentage of mortgage loans that are past due or in default. It measures the overall health of the mortgage market and is often used as an indicator of potential economic problems, as rising delinquency rates can signal a weakening economy or housing market.
<img src="https://assets.site-static.com/userfiles/663/image/national-delinquency-rate-first-lien-mortgages-apr-2023.jpg" width="880" height="641" alt="National Delinquency Rate" title="National Delinquency Rate" class="img_box_center" />
The baseline for this graph is plotted in light green, and it shows the average delinquency rate for the years from 2000 through 2005. The dark green line plots the actual delinquency rate for the past twenty-one years, while the gray line identifies the record low. Currently, US mortgage delinquencies are just above an all-time low.<br /><br />Mortgage Delinquency By Severity
Mortgage delinquency by severity refers to categorizing delinquent mortgage loans based on the number of payments the borrower has missed. Typically, mortgage delinquency by severity is divided into three categories:
30-day delinquency: The borrower is one month behind on their mortgage payment.
60-day delinquency: The borrower is two months behind on their mortgage payment.
90-day delinquency: When the borrower is three months or more behind on their mortgage payment.
Lenders and servicers use mortgage delinquency by severity to track and manage delinquent loans. This information can help them determine the appropriate actions, such as offering payment assistance or initiating foreclosure proceedings. We can use mortgage delinquency by severity as an indicator of the health of the mortgage market, as higher delinquency rates can signal potential economic problems.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-delingquencies-by-severity-apr-2023.jpg" width="880" height="641" alt="Mortgage Delinquency By Severity" title="Mortgage Delinquency By Severity" class="img_box_center" />
The national delinquency rate for mortgage loans increased by seven basis points to 3.45% in February. However, compared to the same month in the previous year, the delinquency rate decreased by 13%. The rise in delinquencies in February was mainly due to a 7.1% increase in borrowers who were 30 days past due. Although there was a decline of 46,000 delinquent borrowers in January, the increase in February left a net increase of 19,000 delinquent borrowers over the two-month period.
On the other hand, delinquencies for borrowers who were 60 days and 90 days past due decreased by 4% and 3%, respectively. Despite improving late-stage delinquencies, the overall delinquency rate worsened in 36 states and the District of Columbia.
Historically, March is the month that experiences the most significant monthly improvement in mortgage delinquency rates, with rates falling by around 10% in an average year. However, this year, potentially smaller tax refunds and new economic pressures may reduce the positive impact of tax refunds on delinquent payments.<br /><br />Early Payment Default Date For FHA Mortgages By Vintage
Early Payment Default (EPD) is when a borrower with an FHA-insured mortgage loan becomes delinquent on their payments within the first 90 days of the loan origination.
<img src="https://assets.site-static.com/userfiles/663/image/epd-rate-fha-mortgages-by-year-apr-2023.jpg" width="880" height="641" alt="EPD Date For FHA Mortgages By Vintage" title="EPD Date For FHA Mortgages By Vintage" class="img_box_center" />
The EPD rate is an important metric for lenders and investors in FHA mortgages because it can indicate potential issues with the loan origination process or underwriting standards. High EPD rates may suggest that the lender is originating loans to borrowers who may have difficulty making timely payments, which could result in losses for the lender and impact the overall health of the FHA insurance fund. Therefore, monitoring EPD rates is important for identifying potential areas of weakness in the origination process and implementing risk management strategies.
Newer FHA loans from 2022 have higher early payment default (EPD) rates than those from 2009 to 2019. 2.3% became delinquent within three months, and 9.3% within a year. The 2019 vintage had more 12-month delinquencies, and 2020 showed higher three-month delinquencies due to the pandemic. The 2021 and 2022 vintage EPD rates remain below those of 2005-2008 vintages, where delinquencies six months after origination ranged from 7% to 11%. This trend is worth monitoring to see how much friction will be created from cooling sales and higher mortgage interest rates.<br /><br />Fed Funds Rate Outlook
The Fed Funds outlook refers to the anticipated direction and level of the Federal Reserve's target interest rate for overnight interbank lending. It is influenced by various economic indicators, such as inflation, employment, and GDP growth, as well as by the Federal Open Market Committee's (FOMC) monetary policy decisions. Investors closely monitor the Fed Funds outlook, economists, and financial institutions, as changes in the target rate can affect interest rates, economic activity, and financial market conditions.
<img src="https://assets.site-static.com/userfiles/663/image/fed-funds-rate-outlook-apr-2023.jpg" width="880" height="641" alt="Fed Funds Rate Outlook" title="Fed Funds Rate Outlook" class="img_box_center" />
In February, the Fed Funds rate outlook changed frequently, starting low but increasing due to strong economic news.
The banking crisis raised uncertainty around potential rate increases by the FOMC, affecting the Treasury rate and spread. Following the collapse of Signature Bank and Silicon Valley Bank, a 25 bps Fed Funds increase in March, and shifting FOMC forward guidance, the market now expects possible rate cuts later in the year.
To say that chaos and confusion are today's standard is an understatement. We have more information that should clarify where mortgage interest rates are headed.<br /><br />Rate-Lock Volume By Purpose
The mortgage industry tracks rate-lock volume by purpose to gain insight into the demand and activity levels for different types of loans. Rate lock volume is an important indicator of the number of loans that are in the pipeline and are likely to close, as borrowers typically lock in their interest rates when they are in the process of obtaining a mortgage.<br />
<img src="https://assets.site-static.com/userfiles/663/image/rate-lock-volume-by-purpose.jpg" width="880" height="641" alt="Rate Lock Volume By Purpose" title="Rate Lock Volume By Purpose" class="img_box_center" />
Another title for this graph could be "Don't Forget To Hug Your Mortgage Loan Professional." Just look at the decline in mortgage originations from just two years ago. The decline of home sales always hits mortgage professionals hard, but they are usually able to offset the decline in purchase originations with refinances. Note how the non-purchase activity stopped completely about a year ago.<br /><br />Payment-To-Income Ratio vs. 30-Year Rates
The payment-to-income ratio is an important metric in real estate sales because it shows the percentage of a borrower's income that goes toward their mortgage payments. This ratio helps lenders determine borrowers' ability to make mortgage payments and avoid default. By tracking payment-to-income ratios across the housing market, we can gain insights into the overall affordability of homes and the potential for a housing market downturn.
<img src="https://assets.site-static.com/userfiles/663/image/payment-to-income-ratio-vs-30-year-rates-apr-2023.jpg" width="880" height="641" alt="Payment-To-Income Ratio vs. 30-Year Rates" title="Payment-To-Income Ratio vs. 30-Year Rates" class="img_box_center" />
The median-priced home in the US now requires 33.2% of the median household income, similar to the 2006 market peak and much higher than the average of roughly 25%. This means that home prices are currently about 25% higher than what underlying incomes typically support at today's interest rates.
One way for affordability to return to long-run averages would take a 10% decrease in prices, a 5% increase in income, and a return to 5.25% interest rates on a 30-year mortgage. As some of the following material will show, holding out for a significant decline in home prices would not be prudent.<br /><br />Monthly P&I Payment To Purchase Average Priced Home
Home affordability is below long-run averages in 49 of the 50 largest markets except Cleveland. 35% of markets require ten percentage points more than the median local market income to afford the median home, and the problem is far worse in some areas.
<img src="https://assets.site-static.com/userfiles/663/image/monthly-payment-to-purchase-avg-priced-home-apr-2023.jpg" width="880" height="641" alt="Monthly P&I Payment To Purchase Average Priced Home" title="Monthly P&I Payment To Purchase Average Priced Home" class="img_box_center" />
Los Angeles (+28pp), San Diego (+21pp), Miami (+21pp), San Jose (+19pp), and San Francisco (+17pp) are the least affordable markets, and except for Miami, all have seen significant price declines due to rising interest rates.
If you did not catch the point, home affordability is tanking the hardest in California. When I produce videos for YouTube explaining US housing market conditions, invariably, Californians claim the bottom is falling out of the market. Unfortunately for them, it is.
I believe home affordability is among the most important topics to consider as we head into the next election cycle. My greatest concern is that we'll see consolidation in housing, and all but the wealthiest among us will be renting homes from a new "Amazon of housing."<br /><br />Sales, Active Listings, And Months Of Inventory
February's home sales activity increased, suggesting we've hit a market bottom for home sales.
<img src="https://assets.site-static.com/userfiles/663/image/sales-listings-months-supply-apr-2023.jpg" width="880" height="641" alt="Sales, Active Listings And Months Of Inventory" title="Sales, Active Listings And Months Of Inventory" class="img_box_center" />
Home sales were 18% below their pre-pandemic average in 2019, due to affordability pressures, and the number of homes available for sale decreased for the fifth consecutive month on a seasonally adjusted basis, reaching the lowest level since May 2020.<br /><br />New Real Estate Listings
New listings were 27% below pre-pandemic levels, and active inventory levels are now 47% below pre-pandemic levels.
<img src="https://assets.site-static.com/userfiles/663/image/new-real-estate-listings-apr-2023.jpg" width="880" height="641" alt="New Real Estate Listings" title="New Real Estate Listings" class="img_box_center" />
In February, 91 of the top 100 and 47 of the top 50 saw a decline in inventory. These low inventory levels are protecting home values. Unlike in 2006, when home sales declined, we are not seeing builder production send the market into a supply excess.
We have been under-building in the US for more than ten years, and the void in the availability of homes is the primary reason home prices are so high. As always in real estate, the supply and demand for homes determines the direction of home prices.
While higher mortgage interest rates have slashed the demand for homes, the declining supply has kept the market balance in favor of home sellers, meaning that in most areas over the long haul, we anticipate home prices rising.<br /><br />Black Knight Home Price Index
Home prices rose in February on both a non-adjusted and seasonally adjusted basis, breaking a streak of seven monthly declines.
<img src="https://assets.site-static.com/userfiles/663/image/black-knight-home-price-index-apr-2023.jpg" width="880" height="641" alt="Black Knight Home Price Index" title="Black Knight Home Price Index" class="img_box_center" />
In January and early February, home prices slightly increased due to a modest easing of affordability and tightening inventory levels.
Adjusted home prices were up 0.16% for the month, the strongest gain since May 2022, while non-adjusted prices were up 0.68%.
However, the percentage change in home prices over the past twelve months fell to 1.94%, the first time it has been below 2% since early 2012. Home prices are expected to fall into negative territory by April (April data will be released in early June), but may return above 0% before year-end if inventory challenges persist and interest rates ease.
Overall, home prices nationally are now down 2.6% from their 2022 peak, slightly better than January's 2.7%.<br /><br />Change In Home Price Index From 2022 Peak
Home prices increased in 78% of the major housing markets across the country in February, a significant contrast from November when prices only rose in 4% of the markets. Despite the change in February, adjusted home prices are generally lower than their 2022 peaks, but the gaps between the prices and peaks narrowed in most areas.
This graph plots the change in the Home Price Index from the very top of the market through February. Can you spot a general trend?
<img src="https://assets.site-static.com/userfiles/663/image/change-hpi-since-2022-apr-2023.jpg" width="880" height="641" alt="Change In Home Price Index From 2022 Peak" title="Change In Home Price Index From 2022 Peak" class="img_box_center" />
Prices in cities such as San Jose, San Francisco, Austin, Seattle, and Phoenix have experienced the steepest pullbacks, with declines of over 10%. Additionally, Las Vegas, Sacramento, Salt Lake City, San Diego, and Los Angeles have all experienced declines between 7.5% and 10% from last year's peaks.
However, eight markets, including Louisville, Kansas City, Virginia Beach, Oklahoma City, Philadelphia, Hartford, Cincinnati, and Miami, have returned to their peak levels.
There seems to be an East-West divide in the US housing market, though it might be more accurately described as a California-The Rest Of The US divide.
According to CalMatters, In 2021, it was big news — the “California exodus.” Now, it just looks like the new trend: California's population is still shrinking. According to the latest population estimates from the U.S. Census Bureau, California's total population declined by more than 500,000 between April 2020 and July 2022.<br /><br />HPI - Markets With Largest Declines
The following tables reiterate the East vs. West divide in the US housing market.
<img src="https://assets.site-static.com/userfiles/663/image/Markets-Largest-Declines-apr-2023.jpg" width="880" height="641" alt="Markets With Largest Declines" title="Markets With Largest Declines" class="img_box_center" />
In February, the number of markets with year-over-year price declines increased to 15 from 13 in January. Minneapolis (-0.3%) and Raleigh (-0.6%) have marginally declined from last year.
Among the markets with the steepest declines, San Jose (-13%), San Francisco (-11.9%), and Seattle (-10%) had the largest year-over-year declines.
Hartford, Kansas City, Virginia Beach, Cincinnati, and Philadelphia are rising up the ranks with relatively strong affordability and low inventory levels. In contrast, western markets, pandemic boom towns, and some Florida markets are cooling down.<br /><br />Homeowner Equity On Mortgaged Properties
Home prices have softened, resulting in a contraction in mortgage holder equity, but it rebounded somewhat in February.
<img src="https://assets.site-static.com/userfiles/663/image/homeowner-equity-on-mortgaged-properties.jpg" width="880" height="641" alt="Homeowner Equity On Mortgaged Properties" title="Homeowner Equity On Mortgaged Properties" class="img_box_center" />
Total mortgage holder equity is down $2T (12%) from its 2022 peak, and the tappable equity (the share available to lend/borrow against while still maintaining a 20% equity cushion) has dipped by $1.6T (15%).
Despite the decline, $9.3T in equity remained available to tap as of the end of February, which is still up 56% ($3.4T) over the past three years.
To put those trillions of dollars into perspective, the average mortgage holder has $178K in tappable equity, down from more than $210K early last year but still $61K (54%) above the market average three years ago. Overall, homeowners still have strong equity cushions, despite recent declines.
This kind of information on homeowner equity explains why we SHOULD NOT expect elevated rates of foreclosures any time soon. People who get behind on their mortgage payments, for the most part, can sell their homes, pay off their debt, and walk away with cash.<br /><br />Distribution Of Equity Withdrawals
It is prudent to track the distribution of equity withdrawals in the US mortgage market because it can provide insight into consumer behavior and economic trends. When homeowners withdraw equity from their homes, they often use it for consumption or investment purposes, which can impact the overall economy.
<img src="https://assets.site-static.com/userfiles/663/image/distribution-equity-withdrawals-apr-2023.jpg" width="880" height="641" alt="Distribution Of Equity Withdrawals" title="Distribution Of Equity Withdrawals" class="img_box_center" />
In the fourth quarter of 2022, more than 60% of borrowers who added a second lien to withdraw equity had taken out their first lien in 2020 or 2021. This makes sense because they locked in near-record-low first lien rates and have seen considerable home price gains since taking out their mortgages.
When I look at this graph, it is apparent that a lot of cash entered the economy in 2020 and 2021. Coupling that with the economic stimulus provided for COVID relief makes me wonder if our economy might be due for a hard downturn, as it's not likely we'll see as many homeowners tapping into their home equity with today's higher mortgage interest rates.
<br /><br />Active Forbearance Plans
The forbearance actions initiated during the COVID-19 pandemic provided critical relief to millions of borrowers struggling to make payments due to job losses, reduced income, and other pandemic-related challenges. The forbearance programs allowed borrowers to temporarily pause or reduce their monthly payments without penalty, helping them avoid default and foreclosure.
<img src="https://assets.site-static.com/userfiles/663/image/active-forbearance-plans-apr-2023.jpg" width="880" height="641" alt="Active Forbearance Plans" title="Active Forbearance Plans" class="img_box_center" />
As of now, it is difficult to provide a final verdict on the forbearance actions as the programs are ongoing, and their long-term impact on borrowers and the economy remains to be seen. However, initial data and reports suggest that the forbearance programs have successfully prevented widespread default and foreclosure.<br /><br />Current Status Of Loans That Have Left COVID-19 Forbearance Plans
When five million borrowers jumped into forbearance plans, we were immediately inundated with reports claiming that the housing market would soon be flooded with foreclosures from people who lost their jobs.
<img src="https://assets.site-static.com/userfiles/663/image/current-status-loans-covid-forbearance-plans-apr-2023.jpg" width="880" height="641" alt="Current Status Of Loans That Have Left COVID-19 Forbearance Plans" title="Current Status Of Loans That Have Left COVID-19 Forbearance Plans" class="img_box_center" />
If you look back at what I wrote as the COVID-19 pandemic swept through the US in early 2020, I was confident that the low inventory of homes and the equity in the housing market would protect us from a foreclosure crisis. This graph proves that I was correct.
Only the tiny slivers of black and dark gold represent the "wave of foreclosures" that was supposed to be as many as eight million homes (but has been well below 200,000). There are about 630,000 homes that remain in a delinquent status, but the market has seen equity increase by more than 30% since they were started, so you can bet that many will be able to sell without entering foreclosure.
As always, if it bleeds, it reads, so the articles that promised doom and gloom were widely popular. But wrong.<br /><br />Stick With The Facts
The housing market is terribly unhealthy, but ill health is due to a lack of homes and the resulting soaring home affordability crisis.
Reports of an impending foreclosure wave were fabricated to generate views and are not based on actual data regarding the strength of the US housing market and mortgage pipeline.
The national delinquency rate remains near a 21+ year low, and there is a historically low supply of homes in the US. It's unlikely that masses of people will lose their homes to foreclosure sales, as the market has gained significant equity over the past three years.
Home prices are relatively stable, and most of the US continues to see home prices rise and homeowner equity grow, with California being an exception. Don't be swayed by hype reports; the facts are in the data we update here weekly.
2023-04-10T03:00:00-07:002023-05-01T09:21:43-07:00Joe Manausatag:manausa.com,2012-09-20:31785Are Home Prices Heading for a Crash? The Latest Insights and Analysis<img src="https://assets.site-static.com/userfiles/663/image/home-prices-what-to-expect-crash.jpg" width="880" height="587" alt="Are Home Prices Heading for a Crash? The Latest Insights and Analysis" title="Are Home Prices Heading for a Crash?" class="img_box_center" />
The US housing market has been a frequent topic in the news, but a crucial factor is often overlooked when determining the direction of home prices. This factor is the current months of supply of homes for sale.
In this article, we'll delve into the fascinating connection between supply and demand in the housing market and how it affects the rise and fall of home prices nationwide. We’ll also accurately assess what to expect from home prices for the remainder of 2023.
From the bustling cities to the quiet suburbs, we'll examine the current state of the US housing market and provide insights into what it means for buyers, sellers, and investors alike.<br /><br />The Reason Home Prices Rise And Fall
Due to the memories of the Housing Bubble and the Great Recession, many people anticipate a decline in home prices (<a href="https://www.manausa.com/blog/gut-feelings-real-estate/" title="My Head And My Gut Are At Odds On This Housing Market">learn more about recency bias here</a>). As a result, I conducted a thorough analysis of the leading markets in the United States to demonstrate the flaws in many reports that attempt to predict the direction of home prices. It is important to note that I am not referring to the usual fluctuations in home prices but rather a sustained changing trend over an extended period, not just a few months.
In general, home prices will only experience a decline lasting a year or more if the balance between supply and demand shifts towards an excess of inventory. This can happen in a few ways: demand may decrease to the point where the existing supply exceeds market needs, supply may increase far beyond demand, or both supply and demand may shift in a way that results in an oversupply of homes.
When there is an excessive number of homes for sale, the market is driven by buyers, resulting in a decline in home prices. In the opposite scenario, when there is a limited number of homes for sale, the market is driven by sellers. While various factors may influence the housing market, the supply and demand dynamic is the only factor that has a lasting impact on home prices in each local market. There are no other significant influences.
So let's see what the latest numbers reveal about the current supply and demand dynamic in 992 of the metropolitan areas tracked by the Zillow data machine.<br /><br />There Is Only One Market
To conduct a thorough analysis of the housing market, it's important to recognize that there is only one market. There isn't a distinct market for single-family detached homes because buyers have the option to choose a condominium or townhouse instead. Similarly, there isn't a separate rental market because tenants can become buyers and vice versa.
To evaluate the potential of the housing market, it's necessary to examine all parties involved, including buyers, tenants, sellers, and landlords. One cannot argue that there is a shortage of homes being built if a record-level number of apartment buildings are currently under construction and reaching new heights in terms of units.
Rental Rates Continue Higher
We must study the trends in rents and prices to find the supply and demand dynamic that most likely exposes a market change. The signal is loud and clear when prices and rents move in the same direction (higher or lower). When they are moving in opposite directions, the signal is clear too.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-rent-index-march-2023.jpg" width="880" height="641" alt="Graph depicts us rental rates over time" title="Zillow Rents Graph" class="img_box_center" />
The graph displays two variables: the median monthly rental rate and the year-over-year change in rents. The blue area represents the median monthly rental rate, while the red line indicates the year-over-year change in rents. Currently, the year-over-year change in rents is more than six percent growth since this time last year.
Both home prices and rental rates have soared higher in recent years, a signal that there is not enough shelter in the US. Some local markets are not facing these conditions, but the US is short on housing overall. With prices flat or falling and rents rising, it suggests something is impacting home affordability.
Reflecting on the housing bubble and the Great Recession, it's intriguing that rental rates didn't decrease despite the fall in home prices. As inventory moved from the "for sale" market to the "for rent" market, rental rates continued to rise.
This observation is significant because it suggests that the cause of the housing crisis was not overbuilding (we did not have too much shelter). Instead, it was a shift in the government's traditional lending standards that limited demand from homebuyers. The government's actions did not impact the need for shelter but rather made it challenging for people to secure home loans, which led them to consider renting properties instead.<br /><br />Expect Home Prices To Recover In 2023
The evidence is clear. The demand for homes has fallen, but so has the supply of homes for sale. When we look at the data that Zillow has collected on the existing inventory of homes for sale, coupled with recent home sales, it is clear that the months of supply of homes is such that we should expect home prices to rise at historically normal rates (3.5% to 4.5%).
Fewer than 10% of markets should expect to see home prices fall, while roughly one-half of all markets should experience home price appreciation above the historical norm.
The US housing market is experiencing a significant shortage of available homes for sale in most local markets. This lack of supply is expected to result in a continued rise in home prices throughout 2023. While this may seem daunting for potential homebuyers, it also presents an opportunity for current homeowners to maximize the value of their investment.
As the housing market continues to evolve, it's essential to stay informed and adapt to changing conditions to make the best decisions for your financial future. Whether you're looking to buy or sell, understanding the trends and factors that impact the US housing market is crucial for success.<br /><br />Median Home Price Declines
The latest reports from Zillow and other reporting agencies show that (year-over-year) home prices fell for the first time in ten years. This fact has led to amateur speculation of home prices dropping by 30%, 40%, and even as much as 50%. You must wonder, are home prices going to crash?
<img src="https://assets.site-static.com/userfiles/663/image/us-median-home-price-monthly-march-2023.jpg" width="880" height="641" alt="Graph plots the monthly US Median Home Price For 15 Years" title="US Median Home Price" class="img_box_center" />
This graph illustrates Zillow's US median home price measurement from 2008 until now.
At the far right end of the graph, it can be observed that the median home price in the US dropped by $100, which is equivalent to 99.97% of the previous year's median price, by the start of February. The graph's two most recent "stars" indicate that the gains made in median home price throughout 2022 have been nullified due to an equivalent decline in median home price.
I emplaced the blue stars on the graph to show that the median home price tends to decline at the start of every year, typically through February, and then rises from that point forward. While many reports call for continued price declines, history tells us we should expect the median to rise.
Of course, who needs expectations when we can measure the supply and demand for homes!<br /><br />Unhealthy Housing Market
Despite home prices appearing to be resistant to a substantial correction, this does not imply that the housing market in the United States is in good condition. In fact, I believe that it may be in its worst state ever.
<img src="https://assets.site-static.com/userfiles/663/image/home-prices-compared-to-wages-march-2023.jpg" width="880" height="641" alt="Graph plots the monthly US Median Home Price and US Median Income" title="US Home Prices Versus Wages" class="img_box_center" />
This graph compares the median home price with the median family income over time. The median home price is plotted in gray while the median family income is shown in blue. The resulting ratio of home prices to income is shown in gray.
For at least fifty years prior to 2000, the median home price fluctuated between 2.5 and 3.5 times the median family income. From 2000 to 2016, this ratio grew to 3.5 to 4.5 times income and recently has shot above 5. Families today are spending twice as much on housing as they did fifty years ago, and the reason (<a href="https://www.manausa.com/blog/rss/" title="RSS Feed for the Tallahassee Real Estate Blog">if you follow my blog</a>) is clear.
The US does not have enough homes to house its growing population.<br /><br />Buyers' Market Conditions Remain Rare
After acquiring Zillow's latest data on housing inventory and monthly sales, I discovered that out of the 992 markets that Zillow tracks, I could compare the balance between supply and demand in 94 of the metropolitan areas. The resulting graph isn't pretty, but it sure speaks volumes.
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-market-months-of-supply-mar-2023.jpg" width="880" height="641" alt="Graph plots the monthly US months of supply of homes for sale" title="US Months Of Supply Of Homes For Sale" class="img_box_center" />
This graph plots the months of supply of homes for sale in 94 key metropolitan areas tracked by Zillow. Overall, it shows that the average months of supply of homes for sale across the US is 4.2 months of supply, a level that historically would be considered a sellers' market.
But if you have seen my past articles on how Digital has impacted home sales, then you know that I believe housing market equilibrium has changed. In order to keep today's article brief, I will encourage our readers to check out <a href="https://www.manausa.com/blog/housing-market-equilibrium-change/" title="Market Equilibrium: How The Balance Has Changed In Real Estate">Market Equilibrium: How The Balance Has Changed In Real Estate</a> for a thorough analysis of why we should measure market equilibrium at four months of supply rather than the historical six months of supply.
This graph shows market equilibrium (the relationship between supply and demand that produces historically normal rates of growth) ranging from four to six months. Any result above the yellow field is in a strong buyers' market, any result below the yellow field is in a strong sellers' market, while those within the yellow field are near equilibrium.
Current measurements indicate that just seven markets (out of 94) are in clear buyers' market conditions, while sixty markets (nearly 2/3rds) remain in sellers' market conditions, and roughly a quarter of the markets are in equilibrium. Does this look like a US housing market poised for major home price declines? [Hint: NO!]2023-03-27T03:00:00-07:002023-03-27T09:45:48-07:00Joe Manausatag:manausa.com,2012-09-20:35218A Home for Everyone? Zillow's Real Estate Update Reveals Clue<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-sales-report-march-2023.jpg" width="880" height="587" alt="March 2023 Zillow Housing Market Update" title="Zillow Housing Report March 2023" class="img_box_center" />
Are you ready to take a deep dive into the latest trends and insights shaping the housing market today?
In this article, we'll guide you through ten real estate market graphs from Zillow that offer a comprehensive understanding of the current landscape. From changing home values to shifting demand activity, we'll reveal the key factors driving the market and explore how they could impact your buying or selling decisions.
Join us on this exclusive journey and gain valuable insights into the real estate landscape, presented in a detailed and easy-to-understand format. Let's begin our exploration!<br /><br />
Holistic Approach Required To Understand Housing
To truly understand the current housing market, relying on a single metric can be misleading and inaccurate. While metrics such as home prices or inventory levels can provide a general idea of market performance, they only paint a small picture of the complex and multifaceted housing market.
For example, if home prices are rising, it doesn't necessarily mean the market is healthy or an ideal time to buy or sell. Instead, a price increase could be due to a lack of inventory, low-interest rates, or high demand in specific areas. It could also indicate a speculative bubble that could burst at any moment.
On the other hand, metrics such as housing starts, building permits, mortgage delinquency rates, and foreclosure rates can provide valuable insight into the market. Examining multiple metrics is crucial to gaining a comprehensive understanding of the housing market's trends, challenges, and opportunities.
For instance, if housing starts and building permits are decreasing while prices are increasing, it could signify a potential shortage of housing supply in the future. Similarly, rising mortgage delinquency rates and foreclosure rates could indicate financial stress among homeowners and potential risks for the overall market.
Therefore, understanding the housing market requires a holistic approach that considers various metrics and data points. By doing so, you can gain a more accurate and nuanced understanding of the market, which can guide your decisions as a homeowner, homebuyer, or real estate investor.
In this report, we'll examine ten key metrics that Zillow tracks to deliver a comprehensive update on the housing market's current state. By exploring these metrics, we'll gain valuable insights that can help us make informed decisions about the housing market's trends and future direction.
Demand Continues To Fall
You have probably heard about the decreasing number of homes sold each month in the real estate market. To better understand this trend, Zillow has provided a graph displaying its estimated number of unique properties sold per month. The graph depicts an 18-month trend, providing insight into the current state of the real estate market.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-sales-count-march-2023.jpg" width="880" height="641" alt="Zillow's count of all US home sales March 2023" title="Zillow Unit Home Sales Graph March 2023" class="img_box_center" />
In this graph, Zillow reveals home sales in the US have been declining for the past eighteen months up to February 2023. Year-over-year sales are a crucial metric in understanding market trends, as they remove the influence of seasonality by comparing the same months each year. For instance, February 2023 saw 31% fewer homes sold than February 2022.
It's essential to note that this graph only contains data since 2009, and the peak of home sales during that period is significantly lower than the number of homes sold during the housing bubble from 2004 to 2006. This reminds us that recent years were not marked by the irrational exuberance of overhyped new investors that artificially propped up the market more than fifteen years ago.
So you might wonder why home sales have declined for eighteen months. In this article, we will examine the possible reasons behind this trend and what it could mean for the future of the real estate market.<br /><br />
Mortgage Interest Rates And The Demand For Homes
This graph displays the average 30-year fixed mortgage interest rate dating back to 1971. The most recent months on the graph can explain one of the reasons for the recent decline in home sales.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-interest-rate-history-graph-march-2023.jpg" width="880" height="641" alt="Average monthly mortgage interest rates March 2023" title="Recent Mortgage Interest Rates Graph March 2023" class="img_box_center" />
In mid-March, the Mortgage News Daily website reported that the average 30-year fixed mortgage interest rate was 6.5%, a 46% increase from the rate one year ago at 4.5%.
While there has been a large increase in the rates charged to homebuyers, nearly a year has passed since rates exploded higher, so many buyers in the market have adjusted. With rates still 14% lower than the historical average, I'm not concerned about buyers adjusting to current rates (so long as they do not move too much higher).
Many reports blame the decline in home sales solely on higher mortgage interest rates, but that story does not pass muster, and here’s why:
Home sales started plummeting months before rates hit 3.3%. They started to slide when mortgage interest rates were at record lows, so we cannot solely blame the current housing market woes on mortgage interest rates. In fact, home sales fell for six consecutive months where mortgage interest rates were below 4%, so there has to be more to declining home sales than just an increase in mortgage interest rates.
The upcoming graphs will uncover other significant reasons behind the decrease in home sales and may provide an explanation for the stability of home prices. However, it is essential to note that no single metric can fully explain future trends in the housing market. We need to consider various data points to have a more comprehensive understanding.<br /><br />The Inventory Of Homes For Sale
The inventory report has unveiled a stark difference between the current real estate market and that of the past. To be clear, today’s market is very different than the one in 2006 that led to the housing bubble. Unlike the situation in 2006, when the inventory of homes for sale was rising rapidly, there has been a notable decline in the number of unique property listings available each month since the beginning of 2019.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-listings-count-mar-2023.jpg" width="880" height="641" alt="Zillow's inventory of US homes for sale March 2023" title="Zillow Inventory Of Homes For Sale Graph March 2023" class="img_box_center" />
This graph plots the number of homes available each month, shown in blue, and the year-over-year inventory change, represented by the red line. The point where the red line intersects with the dashed-blue line in July 2019 and July 2022 indicates the market's shift from inventory growth to inventory reduction and back to growth.
Although there has been concern by some of a significant increase in inventory, the 17% rise in listings is nothing compared to the over four million listings during the housing bubble years. Today, we have well below 850,000 homes listed, 79% fewer than fifteen years ago.
Reports anticipating the inventory to rise as home sales decline overlook the source of new listings. With new construction inventory significantly lower than historical norms, we must rely on discretionary sellers to meet our inventory needs.
However, most discretionary sellers are also discretionary buyers. When a buyer cannot afford a home and leaves the market, a discretionary seller also leaves. Over 50% of the time, a buyer leaving the market also leads to a seller leaving the market. As move-up and move-down buyers have slowed, inventory growth is not as expected.<br /><br />Monthly Inventory Of Listings
This graph provides a different way of looking at the number of listings in the past four years and helps showcase the inventory volume decrease.
<img src="https://assets.site-static.com/userfiles/663/image/number-zillow-home-sales-month-year-march-2023.jpg" width="880" height="641" alt="graph of US home sales by month and year ending March 2023" title="Number Home Sales By Month & Year March 2023" class="img_box_center" />
This graph compares the monthly influx of listings from the previous four years to this year's listings, represented by the black line. The number of homes available for sale is slightly higher than in 2022 but still far lower than what was available in 2019, 2020, and 2021. It's important to note that inventory was scarce in those years as well, so we need to be alarmed; Not that there are fewer homes than usual, but fewer homes are available than in years with insufficient listings.
Currently, the number of listings is much lower than in recent years, and all four years shown were seller's markets with too few listings to meet the demand in the market. For home prices to fall for an extended period, demand must significantly decrease to reverse the supply and demand dynamic. While some markets may experience falling home prices due to declining populations, most US housing markets have a supply void that has slowed buyer activity, even when mortgage interest rates were below 4%.<br /><br />New Listings Still Too Few
This graph depicts the monthly count of newly listed properties in the market for the past four years, and currently, the number of new listings is at its slowest.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-new-listings-last-month-march-2023.jpg" width="880" height="641" alt="Graph of new listings in the US for March 2023" title="New Listings Last Month March 2023" class="img_box_center" />
Many national news media outlets have predicted impending doom with home prices set to plummet, but the decreasing inventory suggests otherwise. For there to be a significant decline in prices, the supply needs to exceed demand. However, the graph shows that the supply is decreasing at a similar or faster rate than the demand. Hence, there is no indication of a growing supply issue at this time.
On the contrary, due to the supply shortage, there will be added pressure on home prices to rise should anything happen that stimulates demand. Therefore, according to Zillow's most recent data, it is reasonable to conclude that home prices will not significantly decrease in most local US housing markets.<br /><br />Home Appreciation Is Slowing
Let's look at what Zillow reports about the median US home price.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-median-home-price-mar-2023.jpg" width="880" height="641" alt="Zillow's measure of the median home price March 2023" title="Zillow Median Home Price Graph March 2023" class="img_box_center" />
This graph displays the median list price in the blue field, and the red line plots Zillow's estimate of the median home sales price during the same period. The blue field demonstrates a seasonal pattern, with prices starting low at the beginning of the year, increasing in the summer, and then decreasing slightly towards the end of the year. Reports of "list prices dropping" are insignificant and ignorant, as the median list price routinely declines at the end of each year.
This graph highlights two essential points. First, home prices generally increase, so it's reasonable to expect end-of-year asking prices to be higher than at the beginning of the year. Second, sellers who initially asked for inflated prices earlier in the year often have to reduce their prices to sell before the year's end. Homeowners can ask any price they want, but they need to meet the market at the right price to sell their property.
The red line in the graph shows that there is no discernible intra-year cycle for home prices; they tend to rise steadily. Although the median home sales price had been increasing rapidly in the past few years, the decreasing number of sales has now flattened the median home price growth rate. It will take a few more months to determine if buyers are purchasing cheaper homes or if home values are declining.<br /><br />Zillow Expects Slower US Home Home Price Growth
This graph estimates the median home price in the US, taking into account the typical prices of single-family homes, condominiums, and co-ops.
However, this graph stands out because it concentrates on a specific market segment. It analyzes properties between the 35th and 65th percentile, representing the middle third of the market. The graph accurately estimates the median home price trends over time by examining this range of homes. This gives us a unique perspective and a better understanding of the US housing market.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-value-index-march-2023.jpg" width="880" height="641" alt="Zillow's Graph Of The Median Home Price March 2023" title="Zillow Median Home Value Index March 2023" class="img_box_center" />
By closely examining this graph, you will notice that Zillow has provided home value data from 2000 to 2024. This is because their dataset includes both historical data and a prediction that home values will increase by 1.0% over the next year.
It's worth noting that Zillow's estimation has become more conservative. For example, in January of last year, it estimated an annual growth rate of 17.3%.
Zillow's Home Value Index sheds light on the alarming decline in home affordability. According to Zillow's estimates, the median home price has increased by more than 109% since February 2012, with an annual growth rate of nearly 7%.
Comparing the rate of home price growth over the past two years to the rate during the housing bubble reveals a concerning trend. The steepness of the slope indicates a faster acceleration in price increases, which explains the decline in the affordability of homes.
And Zillow is not the only real estate platform predicting home price growth.
CoreLogic Expects 3.1% Growth In Home Prices
First American CoreLogic, Inc., a large provider of US property and ownership information, just released their forecast for home prices.
<img src="https://assets.site-static.com/userfiles/663/image/corelogic-home-price-forecast-march-2023.jpg" alt="CoreLogic Home Price Forecast Graph March 2023" title="Corelogic Home Price Forecast March 2023" class="img_box_center" width="880" height="641" />
CoreLogic predicts that home prices will increase by 3.1% in the coming year, more than three times Zillow's forecast.
It's important to understand that the supply and demand of homes is the primary factor affecting changes in home prices. The fact that prices have risen steeply in the past isn't relevant; we should be focused on the shortage of available homes that is driving this issue.
Due to the extremely low number of homes on the market for sale, home prices have skyrocketed. As the next graph shows, home prices are rising in most markets in Zillow's report.<br /><br />Are Home Prices Falling?
Are you hoping that home prices will fall? If so, brace yourself for some surprising information! According to Zillow, reports of falling home prices only apply to just 8% of cities tracked by Zillow and are not widespread across the country.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-year-over-year-home-price-change-march-2023.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth March 2023" title="Year-Over-Year Home Price Changes March 2023" class="img_box_center" />
Of the 896 cities reported by Zillow, 822 posted growth in home prices for the past twelve months. Only 74 markets reported declines.
Zillow continues to report year-over-year increases in home prices in the US, but understandably, some of our readers may have heard different news. To delve deeper into the issue, let's explore why there are conflicting reports about declining home prices.<br /><br />Month-Over-Month Home Prices: Growing In 57% Of US Markets
This graph shows which housing markets in the United States have had the largest increase in home prices over the past month.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-month-over-month-home-price-change-march-2023.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth March 2023" title="Month-Over-Month Home Price Changes March 2023" class="img_box_center" />
Out of the 896 cities that Zillow reported on, 629 (70%) experienced an increase in home prices in December, while 267 (30%) saw a decrease. This could be why there are numerous reports of declining home prices.
If you've been following my recent reports on US home prices, you may remember that the median home price typically rises in a staggered manner throughout the year or decreases similarly in declining years. It would be premature to identify a trend in price changes after just a few months because doing so would have resulted in reporting declines for the past five years, even though the median home price was rising.
It's evident that the growth rate for home prices is slowing down, but it's too early to predict that we'll see annual price drops in most US housing markets. The market is still appreciating, with 92% of markets reporting annual gains and 70% showing monthly gains.
When reports suggest a significant decline in home prices, such as 30%, 40%, or 50%, it's important to question the data that led to that conclusion. I certainly have not encountered such data.<br /><br />Rental Rates Are The Key For Measuring Supply
The median rental rate graph holds the key to affirming or refuting reports on the overall supply of homes in the US. As we all know, when there is a shortage of homes available in the market, both home prices and rental rates tend to skyrocket, while the opposite happens when supply exceeds demand. Thus, Zillow tracks rents as well as home prices as a useful indicator of supply imbalances, making the median rental rate graph a crucial tool for understanding the US housing market.<br />
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-rent-index-march-2023.jpg" width="880" height="641" alt="Zillow's measurement of the change in rental rates March 2023" title="Zillow Observed Rent Index Graph March 2023" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
This graph displays the monthly rental rate index (median rent) in blue and the year-over-year percentage change in red. The significant growth shown in red, which peaked at over 17% annual growth in February, is worth noting. However, rents have grown by 6.3% in the past twelve months, which is slower than the rates observed in the prior months.
This rising trend is due to the declining inventory of homes for sale and rent. As a result, buying and renting a home have become more expensive, which is reflected in the increase in rental rates. In February, the median rental rate of $1,976 was 24% higher than the median rental rate recorded two years ago. This shows that rental rates have also become unaffordable, along with home prices. After all, who do you know that could easily handle a 24% increase in the cost of living?
The fact that both rents and prices are increasing together confirms that the supply of homes in the US is insufficient to meet the growing demand. This shortage will likely continue until a significant output from US home builders. Although there are some markets where the supply of homes exceeds demand, the overall US housing market remains undersupplied.<br /><br />The Crisis That Is Home Affordability
The current state of home affordability is a major issue that demands attention. People who cannot afford to buy a home are also being priced out of the rental market. Even when home prices fell in 2008, rental rates continued to rise, indicating a significant problem with the housing inventory.
This issue in 2008 stemmed from decreased demand for homes for sale, mostly caused by the government's intervention in the housing market. The government's measures to control the market made it very difficult for borrowers to qualify for loans, which resulted in only the wealthiest buyers being able to purchase homes. This, in turn, led to increased demand for rental properties, driving up rental rates even as home prices dropped.
Today, the housing crisis is primarily caused by a lack of inventory. Even after doubling, mortgage interest rates are still relatively low, so they cannot be blamed for the high cost of housing. The root of the problem lies in the fact that we have not built enough homes in the past fifty years, and the NIMBYism movement is partly to blame for this.
To address this issue, local governments must work on solutions to increase the number of properties available to house our growing population. This will require leadership that many elected officials may not possess. As concerned citizens, we can take action by contacting our local elected officials and expressing our dissatisfaction with the soaring prices of homes and rentals. It is crucial to clarify that the root of the problem is a lack of supply and that a different approach is needed to address the housing shortage in America.
If you have thoughts on the limited housing supply in America, please share them in the comments section below. Let's work together to find solutions to this critical issue.2023-03-20T03:00:00-07:002023-04-03T15:03:41-07:00Joe Manausatag:manausa.com,2012-09-20:34216Unlocking Zillow's Latest Housing Trends And Forecasts<img src="https://assets.site-static.com/userfiles/663/image/zillow-housing-report-february-2023.png" width="880" height="587" alt="Buckle up for a clear and concise update on the real estate market, and discover the truth for yourself with today's Zillow Housing Market Update" title="Zillow Housing Report February 2023" class="img_box_center" />
Are you tired of conflicting reports about the housing market? Look no further!
Zillow, the real estate giant with a wealth of timely data on the housing market, has shared its extensive data that we have used to generate our monthly housing market update.
Buckle up for a clear and concise report on the US real estate market, and discover the truth for yourself with today's Zillow Housing Market Update.<br /><br />
Numerous Metrics Required To Forecast Housing
If you want to understand the current housing market, relying on just one metric can be misleading and potentially inaccurate. While metrics such as home prices or inventory levels can give you a general idea of how the market is doing, they do not provide a complete picture of the complex and multifaceted housing market.
For example, home prices may be rising, but that does not necessarily mean that the market is healthy or that it is a good time to buy or sell. A rise in prices could be due to a shortage of inventory, low-interest rates, or high demand in certain areas. It could also indicate a speculative bubble that could burst at any moment.
In addition, other metrics such as housing starts, building permits, mortgage delinquency rates, and foreclosure rates can give valuable insight into the market. By examining multiple metrics, you can get a more comprehensive understanding of the housing market's trends, challenges, and opportunities.
For instance, if housing starts and building permits are declining while prices are increasing, it could signal a potential shortage of housing supply in the future. Similarly, if mortgage delinquency rates and foreclosure rates are rising, it could be an indication of financial stress among homeowners and potential risks for the overall market.
Overall, understanding the housing market requires a holistic approach that considers multiple metrics and data points. By doing so, you can gain a more accurate and nuanced understanding of the market, which can inform your decisions whether you are a homeowner, homebuyer, or real estate investor.
Today's report quickly examines 11 key metrics Zillow tracks, delivering a very solid housing market update.
Homebuyer Activity Continues To Slow
This graph reports Zillow's estimated number of unique properties sold each month, and it shows a 16-month trend has formed.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-unit-home-sales-february-20223.jpg" width="880" height="641" alt="Zillow's count of all US home sales February 2023" title="Zillow Unit Home Sales Graph February 2023" class="img_box_center" />
The blue bars plot the number of homes sold, while the yellow bars plot the year-over-year change in sales. When the yellow bars rise about the horizontal axis, unit sales grew. When the yellow bars fall below the horizontal axis, unit sales fell.
Sales through December 2022 show that home sales declined in the US for sixteen months. Year-over-year sales are an important metric because it removes the influence of seasonality by comparing the same months each year. For example, the number of homes sold in December 2022 was 38% fewer than in December 2021.
Though this graph only contains data since 2009, it's important to point out that the peak of home sales seen on the graph is far lower than the number of homes sold during the housing bubble formation from 2004 through 2006. I point this out as a reminder to our readers that recent years were not filled with the irrational exuberance of amped-up new investors that propped up the market more than fifteen years ago.
So why have home sales slowed for sixteen straight months?<br /><br />
Changing Mortgage Interest Rates Impact Demand
This graph plots the average 30-year fixed mortgage interest rate since 1971, where the most recent months shed light on one reason for the decline in home sales.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-interest-rates-graph-february-2023.jpg" width="880" height="641" alt="Average monthly mortgage interest rates February 2023" title="Recent Mortgage Interest Rates Graph February 2023" class="img_box_center" />
When I was preparing this graph in mid-February, I checked the Mortgage News Daily website, and it reported that the current rate was 6.8%, while the one-year-ago rate was 4.08%. Interest rates are 67% higher than a year ago, but I'm concerned about its recent rebound higher.
The average lender could offer 5.99% on a top-notch conventional 30yr fixed mortgage loan just two weeks ago. Today, that same lender would be closer to 6.8% (an increase of more than 13.5%).
This is an incredibly abrupt move at almost any other time in the past several decades. The only reason we're not freaking out is that this sort of volatility has been common at times over the past year. Moreover, the most recent highs saw rates well into the 7% range, so if we're still in the 6's, rising rate headlines don't have a ton of shock value.
So don't be shocked, but do be aware that rates are quickly closing in on 7% again.
But you must wonder, are rising mortgage rates the only culprit behind the cooling housing market? Think again. Shockingly, home sales started plummeting months before rates hit 3.3%. Home sales started to slide when mortgage interest rates were at record lows, so we cannot solely blame the current housing market woes on mortgage interest rates. In fact, home sales fell for six straight months where mortgage interest rates were below 4%, so there has to be more to declining home sales than just an increase in mortgage interest rates.
Readers who remember the housing collapse in 2006 might be concerned that the supply of homes for sale is rising out of control. That happened in 2006, as builders were in full production mode while buyers were expelled from the market when the government changed lending requirements. Declining demand and rising supply created the bubble that sent home prices plummeting. Is that what we should expect in 2023?
The next few graphs reveal another primary cause of declining home sales and expose the potential answer for the stability of home prices. Remember, one metric alone does not explain future moves in housing, we have to take in numerous data to get a clearer picture.<br /><br />The "Real Deal" On The Inventory Of Homes For Sale
The latest inventory report reveals a striking contrast between current and past real estate markets. Unlike in 2006, the number of unique listings available each month since the start of 2019 has taken a dramatic turn. Read on to discover the eye-opening details.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-inventory-of-homes-for-sale-graph-february-2023.jpg" width="880" height="641" alt="Zillow's inventory of US homes for sale February 2023" title="Zillow Inventory Of Homes For Sale Graph February 2023" class="img_box_center" />
In the graph above, the blue field plots the number of homes available each month, while the red line measures the year-over-year change in inventory. Look where the red line crosses the dashed-blue line in August 2019 and August 2022, when the market shifted from inventory growth to inventory reduction and then back to inventory growth.
There has been much talk about a rapid increase in inventory, but the actual 8% increase in listings is relatively small when compared to the over four million listings during the years of the housing bubble. Today, we have well-below one million homes listed, which is a stark contrast.
Those who expect the inventory to rise rapidly as sales plummet are not accounting for the source of new listings. With new construction inventory far lower than historical norms, we must rely on discretionary sellers to fulfill our inventory needs.
The problem with expecting inventory growth is that most discretionary sellers are discretionary buyers too. When a buyer opts out of the market due to affordability, it also means a discretionary seller is leaving.
Thus a buyer leaving the market results in a seller leaving the market in more than 50% of the cases. The move-up and move-down buyers have slowed, so inventory growth is not as many have anticipated.<br /><br />Monthly Inventory Of Listings
This graph offers an alternative perspective on the quantity of listings in the last four years, providing insight into the decrease in inventory volume.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-number-homes-for-sale-monthly-february-2023.jpg" width="880" height="641" alt="graph of US home sales by month and year ending February 2023" title="Number Home Sales By Month & Year February 2023" class="img_box_center" />
The graph above displays the black line, indicating last year's monthly influx of listings, and compares it with each of the three previous years. It's worth noting that there were only slightly more listings than in 2021, with the number of homes available for sale being 7% lower than in 2021, 9% lower than in 2020, and a significant 36% lower than in 2019. It's essential to remember that the inventory was also scarce in those years, so it's not that we have fewer homes than normal; fewer homes were available in very lean years.
Today, the number of listings is far lower than in recent years, and all four years shown were sellers' markets, where the number of listings was far too few for the demand in the market. Demand will have to go far lower to create the supply and demand dynamic that will cause home prices to fall for an extended period. There will be markets with declining home prices because they have declining populations. Still, most US housing markets have a supply void that has slowed buyer activity, even when mortgage interest rates were below 3%.<br /><br />Incoming Inventory Still Too Low
This graph plots the number of new listings entering the market each month for the past four years, and today is slower than ever.
<img src="https://assets.site-static.com/userfiles/663/image/new-listings-last-month-zillow-february-2023.jpg" width="880" height="641" alt="Graph of new listings in the US for February 2023" title="New Listings Last Month February 2023" class="img_box_center" />
Although many national news media outlets predict a home price crash, the inventory is decreasing. The supply needs to exceed demand to witness a significant decline in prices. However, the graph reveals that the supply decreases at a similar rate or even faster than the demand. Therefore, it is safe to say that there is no indication of a growing supply issue at this time.
In fact, due to the scarcity of supply, there will be added pressure on home prices. So, as of Zillow's most recently released data, it is reasonable to conclude that home prices will not decline significantly in most local US housing markets.<br /><br />Home Price Growth Is Slowing
Let's look at what Zillow reports about the median US home price.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-median-home-price-graph-february-2023.jpg" width="880" height="641" alt="Zillow's measure of the median home list price February 2023" title="Zillow Median Home Price Graph February 2023" class="img_box_center" />
The blue field in the graph shows the median list price, while the red line shows Zillow's estimate of the median home sales price during the same period.
The blue field shows a seasonal pattern on the median list price, with prices starting low at the beginning of the year, moving higher during the summer, and then falling slightly towards the end of the year. I'm seeing reports of "list prices dropping." Of course, they are! The median list price falls at this time every year! Where were those reports in the last six years when asking prices declined in the latter part of each year?
This graph reveals two things. First, home prices generally rise, so it makes sense that end-of-year asking prices are higher than at the beginning of the year. Second, sellers who tried too high of an asking price earlier in the year ultimately reduce their prices to get sold before the end of the year. Remember, a homeowner can ask any price they like, but to get sold, they have to meet the market at the right price.
The red line shows there is no actual inner-year cycle for prices; home prices generally rise. The median home sales price had been rising faster for the past few years, but the declining number of sales has flattened to where prices are growing at more "normal" rates (the average home price growth over the past 80 years is 5.2% annually).
Additionally, one must remember that with higher rates, home affordability falls. Does the slowing growth rate of the median home price mean that home value growth is receding, or does it mean that buyers are purchasing cheaper homes?<br /><br />Zillow Expects Slower US Home Home Price Growth
This graph estimates the median home price in the US by considering the typical price for various types of homes, including single-family homes, condominiums, and co-ops.
But this graph is unique because it focuses on the middle third of the market, analyzing homes that fall between the 35th and 65th percentile. By examining this range of properties, the graph accurately reflects the median home price over time, giving you unparalleled insight into US home prices.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-median-home-value-index-february-2023.jpg" width="880" height="641" alt="Zillow's Graph Of The Median Home Price February 2023" title="Zillow Median Home Value Index February 2023" class="img_box_center" />
If you look closely at this graph, you'll see that Zillow has reported home values from 2000 through 2023 because their dataset includes past data plus a forecast that home values will rise 1.2% over the next twelve months.
Just as a reference to how conservative Zillow's estimate has become, it estimated 17.3% annual growth back in January last year.
Zillow's Home Value Index sheds light on the alarming decrease in home affordability. According to Zillow's estimates, the median home price has surged by over 118% since February 2012, with an annual growth rate of 7.5%.
Comparing the rate of home price growth over the past two years to the rate during the housing bubble paints a concerning picture. The steepness of the slope highlights the acceleration of the increase in prices, which is a cause for concern in terms of the affordability of homes.
But Zillow is not the only real estate platform predicting home price growth.
CoreLogic Is Bullish On Home Prices Too
<img src="https://assets.site-static.com/userfiles/663/image/corelogic-home-price-forecast-february-2023.jpg" alt="CoreLogic Home Price Forecast Graph February 2023" title="Corelogic Home Price Forecast Chart" class="img_box_center" width="880" height="641" />
CoreLogic, another national real estate web portal, believes home prices will grow by 3% over the next year, nearly triple Zillow's growth forecast.
One must always remember that the supply and demand dynamic for homes is the key driver for the change in home prices. It does not matter that we have observed a historic run-up in prices. Instead, we must be concerned about the low production of homes that has created this problem.
The abysmally low supply of homes for sale has caused home prices to soar, and as we will see in our next graph, home prices are growing in 98.9% of the markets in Zillow's report.<br /><br />Home Prices Falling "Everywhere!" ???
Are you one of those people who are rooting for falling home prices? Well, hold on to your seats because you're in for a shock! This graph reveals that reports of falling home prices should be limited to just 10 cities!
<img src="https://assets.site-static.com/userfiles/663/image/year-over-year-home-price-change-february-2023.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth February 2023" title="Year-Over-Year Home Price Changes February 2023" class="img_box_center" />
Of the 884 cities reported by Zillow, 874 posted growth in home prices for the past twelve months. Only ten markets reported declines:
Garderville Ranchos, NV Down 1/3rd of 1%
Red Bluff, CA Down 1/2 of 1%
Carson City, NV Down 1/2 of 1%
Fernley, NV Down 2.3%
Grants Pass, OR Down 2.7%
Shelton, WA Down 2.9%
Coeur D'Alene, ID Down 4%
Boise City, ID Down 4.2%
Fairbanks, AK Down 8.5%
Minot, ND Down 10.1%
Zillow has reported an 11% year-over-year increase in home prices in the US since December 2021, but it's understandable that some of our readers may have heard different news. To delve deeper into the issue, let's explore why there are conflicting reports about declining home prices.<br /><br />Month-Over-Month Home Prices: Growing In 57% Of US Markets
The following graph highlights the US markets that have experienced the highest month-over-month change in home prices.
<img src="https://assets.site-static.com/userfiles/663/image/month-over-month-home-price-change-february-2023.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth February 2023" title="Month-Over-Month Home Price Changes February 2023" class="img_box_center" />
Of the 889 cities reported by Zillow, 505 (57%) posted growth in home prices in December, while 384 markets (43%) reported declines. Perhaps this is why we're inundated with reports of declining home prices.
If you've been following my recent reports on US home prices, you might have noticed that median home prices typically increase in a staggered manner throughout the year (or decrease in declining markets). It's premature to identify a trend in price changes after just a few months, as doing so would have resulted in reporting declines in each of the past five years, despite the fact that median home prices were actually on the rise during those years.
It is clear that the rate of growth for home prices is coming down, but it remains too early to say that we expect home prices to fall annually in most US housing markets. With nearly 99% of markets reporting annual gains and 56% showing monthly gains, the market is clearly appreciating.
When you see reports calling for a 30%, 40%, or even 50% decline in home prices, you have to wonder what data leads them to that conclusion. It seems to me that most reporters are suffering from recency bias and each could learn a lot from the video shown below.<br /><br />Rents: The Litmus Test For Home Prices
Our final graph in today's report plots the change in the median rental rate. We use the change in rents to affirm or refute reports on the overall supply of homes in the US. When supply is low (in both the for-rent and the for-sale markets), both prices and rents rise. The opposite is true when supply is high. So when rents and prices move in the same direction, it often means a supply imbalance.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-graph-observed-rent-index-february-2023.jpg" width="880" height="641" alt="Zillow's measurement of the change in rental rates February 2023" title="Zillow Observed Rent Index Graph February 2023" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
In the graph above, the blue area measures the monthly rental rate index (median rent), while the red line plots each month's year-over-year percentage change. Pay close attention to the rapid growth shown in red.
After peaking at more than a 17% annual growth rate in February, rents have "only" grown by 7.4% over the past twelve months.
Just as the inventory of homes for sale declined, so too has the number of homes for rent. People who must move today have no good choice between buying versus renting a home. The cost for each has exploded higher, though each is rising slower than the rates observed at the beginning of the year.
How is this for perspective? In December, the median rental rate of $1.981 was 25% higher than the median rental rate of $1,585 recorded two years ago in December 2020. This is important to understand because it is not just home prices that have become unaffordable but also rental rates. I often receive comments from viewers on our <a href="https://www.youtube.com/channel/UC91JHHJm-D8cFDeXR1RQIBA" title="Joe Manausa Real Estate On YouTube">YouTube Channel</a> saying they are waiting for home prices to fall. I certainly understand the sentiment, but I have to wonder, where are they living while they await home price declines?
Are they waiting in a rental property where their lease renewal will be 25% higher than two years ago? Or are they waiting in a home they own? If they are right and home prices drop, won’t the home they own drop too? This means they’ll sell cheaper to buy cheaper! So what’s the point in waiting? That’s the trouble with trying to time the housing market; either way, you’ll pay more.
The fact that both rents and prices are moving higher together confirms that the supply of homes in the US is insufficient to house our growing population. Overall, when supply is insufficient to fulfill demand, prices rise. Until we see significant output from US home builders, we anticipate rising prices (and rents). There will be markets where the supply of homes outpaces demand, but overall, the US housing market remains undersupplied.<br /><br />A Home Affordability Crisis
Home affordability is a pressing issue today. When people get priced out of the "for sale" market, they can no longer turn to the "for rent" market, as they will be priced out of that too!
When home prices crashed after the housing bubble, rents kept moving higher. That was a sign that we failed to interpret correctly, as it was a signal that despite the large inventory of homes for sale, there were not "too many" homes built in America.
The imbalance in housing inventory was caused by a sharp drop in demand for homes that were for sale. This drop in demand was partly due to the government's intervention in the housing market. The government made it much harder for borrowers to qualify for loans, which meant that only the wealthiest buyers could afford to buy a home.
The government was concerned about the housing market getting out of control, so they raised the bar for loan qualifications to unprecedented levels. As a result, many would-be buyers were forced to rent instead. The demand for rental properties increased, rental rates continued higher, even as home prices fell.
Loan qualification standards are not an issue today. The entirety of the housing crisis lies on the inventory side, so local governments must work to solve the lack of shelter problem. Many think that mortgage interest rates are to blame, but we must concede that rates are still low (21% lower than the fifty-year average).
Inventory issues will not go away silently. We have not built enough homes in the past fifty years, and much of the blame rests on the shoulders of the <a href="https://www.youtube.com/watch?v=9jOtFZ8sNWg" title="Who To Blame For Soaring Home Prices" data-uw-rm-brl="exc">NIMBYism</a> movement. Opposition to smart, controlled development must be quelled, and we must find solutions to increasing the number of properties to house our growing population. The problem is simple to define but very difficult to cure. It will take a level of leadership that most elected officials do not possess.
If you're concerned about the high cost of housing in our country, there are steps you can take to help fix the problem. One important action is to contact your local elected officials and express your dissatisfaction with the soaring prices of homes and rentals. Make it clear that the root of the problem is a lack of supply and that a different approach is needed to address the housing shortage in America. By doing so, you can help bring attention to this issue and encourage leaders to take action that will benefit the community.
If you have thoughts on the limited housing supply in America, please share them in the comments section below.2023-02-20T04:00:00-07:002023-02-27T15:53:18-07:00Joe Manausatag:manausa.com,2012-09-20:33386Will The New Construction Bottleneck Cause A New Housing Bubble?<img src="https://assets.site-static.com/userfiles/663/image/new-construction-fueled-housing-bubble.jpg" width="880" height="587" alt="Will The New Construction Bottleneck Cause A New Housing Bubble?" title="A New Housing Bubble?" class="img_box_center" />
The US has reached a new record for the number of homes under construction.
About 20% more homes are being built today than when the housing bubble was forming back in 2006, and there is no sign that the new construction pipeline will reverse any time soon.
Perhaps the most significant housing market fears being hyped on social media concern the flood of new homes that will hit the market when construction is completed. These reports declare that inventories will be soaring while home prices crash. I've seen numerous reports calling for as much as a 50% price correction due to the decline in demand and rise in inventory.
Rather than take these unsupported prophecies as fact, why not follow the data and see where it leads us?
Before we get to the analysis, I have included a list of all new construction homes in Florida's Big Bend so that our readers can see what's available today (including this <a href="https://www.manausa.com/property/1699-st-georges-court-east-point-fl-32328/pid-20842761/" title="Florida Snowbird Home For Sale">incredible find on Florida's Forgotten Coast</a>).
New Construction Homes For Sale In Florida's Big Bend<br /><br />Homes Under Construction In The US
When you go onto YouTube and see video titles calling for a 50% price correction in housing, it is often "supported" by the following information about the current number of new privately-owned housing units under construction.
<img src="https://assets.site-static.com/userfiles/663/image/new-privately-owned-housing-units-under-construction-us-january-2023.png" width="880" height="641" alt="New privately-owned housing units under construction January 2023" title="US New Construction Pipeline" class="img_box_center" />
This graph clearly shows that the pipeline is at an all-time high (20% higher than in January 2006), and the trend is still moving higher. Many people are concerned about what will happen when all these homes hit the market.
There are two hugely important factors when considering the abundant pipeline revealed in this graph. First, the pipeline is larger because it is taking longer to build homes today due to supply chain disruptions, and second, most homes are selling before or as they are completed.
We will know an over-supply problem is mounting when the months of supply of completed homes begin to rise rapidly.
Current Supply Of New Construction Homes
This graph plots the median months of supply of new construction homes in the US.
<img src="https://assets.site-static.com/userfiles/663/image/us-new-homes-median-months-supply-january-2023.png" width="880" height="641" alt="Graph of new homes median months supply January 2023" title="Supply Of New Homes" />
The number of finished "ready to buy and occupy" new construction homes is near an all-time low at fewer than two months of supply. This is diametrically different from a growing inventory of homes.
As I explained in a previous report (which you see around the 7:20 - 8:00 mark in the video below), the current pipeline of new homes being built is taking nearly 50% longer to shed new homes; thus, the pipeline can be 50% larger without it producing homes at a faster rate. <br /><br />Scale & Relativity Required In Record-Setting Years
The following graph was inspired by a recent post by <a href="https://kevinerdmann.substack.com/" title="A Unique View of Housing and the US Economy" class="skin-1">Erdmann</a>, who warned that any "record number" has to be scaled with the size of the country over time. So, for example, a half-million more units in our country today, with 142 million existing units, is a lot different than a half-million more units in our country fifty years ago, with 76 million units.
<img src="https://assets.site-static.com/userfiles/663/image/us-new-construction-relative-pipeline-january-2023.png" width="880" height="641" alt="Total housing units under construction compared to overall US population January 2023" title="US New Construction Relative Pipeline" class="img_box_center" />
In the graph above, we have plotted the new construction pipeline relative to the US population over the years. The blue line plots the vacant units for rent (compared to the population size). For example, at the far left of the graph, there were roughly 11 vacant for-rent housing units for every 1,000 people in the US, whereas today, we have just a little more than eight vacant for-rent housing units for every 1,000 people in the US.
The red line reveals that there were just under four vacant for-sale housing units for every 1,000 people in 2000, whereas there are about half as many today. When we examine both the blue and red lines together, we see that vacancies today are lower than at any time in the past 22 years. Homes today are being used at the highest rate on record, a sign that we have too few homes available for our growing population.
Finally, the gray line shows that about five housing units are under construction for every 1,000 people today (slightly higher than the peak in 2006). This could be a cause for concern, but the fact that homes are taking longer to build more than compensates for the difference in the totals of then versus now.
Erdmann advises:
The decline in vacancies since the Great Recession has been unprecedented. From 14 rental units per thousand residents to 8, and from 8 units for sale to 2. Back to 2000, the previous lows had been about 10 and 4. There are about 2 1/2 units per thousand residents under construction in both the apartments and single-family categories. In other words, if every single unit under construction was finished tomorrow and sold (all else equal), vacancies would rise back to where they were in about 2017 and 2000. Those were both periods with constrained supply, as evidenced by (the next graph), which shows shelter inflation (mostly rent) relative to non-shelter core inflation. Rent inflation should not be persistently more than general inflation.
<br /><br />Home Affordability Is Tanking Fast
Long-time readers of the <a href="https://www.manausa.com/blog/rss/" title="Real Estate Tallahassee Florida">Tallahassee real estate blog</a> know that we have been warning about a home affordability crisis for several years, long before mortgage interest rates and home prices rose to current levels. This graph shows the problem has been brewing far longer.
<img src="https://assets.site-static.com/userfiles/663/image/us-shelter-inflation-versus-us-core-inflation-jan-2023.png" width="880" height="641" alt="Graph compares US shelter inflation with US Core Inflation January 2023" title="Shelter Inflation Versus Core Inflation" class="img_box_center" />
In the graph above, the red line plots shelter inflation (mainly "rents), while the blue line plots the non-shelter core inflation. The gray line reveals the difference between the two measurements.
At the far left of the graph, shelter inflation trailed non-shelter core inflation by nearly 18% from 1957 through the late 1960s. This means that rents were rising at rates slower than most goods and services.
At the far right of the graph, we now see rents growing far faster than most goods and services. A simple conclusion from this graph is that compared to other goods and services, the cost of renting a home has been rising fast.
I have highlighted three points on the graph:
A. Something occurred in the late 1960s that caused rents to accelerate in growth more so than other goods and services.
B. In the mid-1980s, we saw shelter inflation draw even with non-shelter core inflation and then finally pass it. In other words, this is when the home affordability crisis began to develop!
C. Something occurred in the mid-1990s that caused shelter inflation to accelerate far faster than non-shetler core inflation.
I suspect some of our readers will have ideas about what happened at points A, B, and C. If you think you know, share your thoughts in the comments below.<br /><br />Home Affordability (Worse Than A Housing Bubble)
No housing bubble is forming. The National Board of Realtors estimates that the US is about 5.5M homes short of what is needed for balance in the overall US housing market. A housing bubble, on the other hand, requires the supply of homes to grow and outrace a declining demand.
The total pipeline of new homes under construction is less than one-third of the shortage. Remember, we don't need 5.5M homes to balance the market, we need 5.5M homes PLUS the "normal" 1.2M average annual new home construction deliveries. When we account for the number of homes needed to keep the market at its current under-supplied state, the current pipeline level won't fix the housing shortage within the next ten years.
So long as builders build too few housing units, we don't have to worry about supply running amuck. Yes, the pipeline of homes under construction is higher than usual, but so is the time it takes to bring these (much-needed) homes to the market. When we look at how the increased pipeline has influenced supply, we see the deficiency grow.
Home affordability, on the other hand, is a real and valid crisis.
I am a broken record on home affordability, but it's such an urgent and important issue that it requires mentioning again. Home affordability is tanking in the US and is directly related to the lack of shelter required by our growing population.
The pace of new home construction slowed in 2008 and has remained far too low for more than 15 years. This shortage has created soaring rents, soaring home prices, and a reversal in the US homeless trend in 2018.
If you want to be part of the solution, it starts with choosing elected officials who understand the need for housing and then holding them accountable for delivering solutions.<br /><br />
Today's US housing market is rife with rumors and speculation unlike any other I have ever seen. I've been selling homes in Tallahassee for over 31 years, but this is the first major market swing during social-media-fueled full-community involvement.
It seems that everybody has an opinion. Unfortunately, for many people who believe what they are fed on Twitter, Facebook, Instagram, and YouTube, the not-so-silent majority leads them astray with half-truths and full-out lies. Sensationalism is the theme of the day, and, as they say, if it bleeds, it reads," so don't be so quick to make a decision based upon the social media consensus.
Today’s observations evolved from an article by Kevin Erdmann, a gentleman who has written two books on the housing market and has the top real estate newsletter I am aware of. He offers both a free version and a paid version of his newsletter, and I recommend anybody with a stake in the housing market to <a href="https://kevinerdmann.substack.com/" title="Erdmann Housing Tracker">subscribe to either version</a>.
Let's look at four graphs that provide insight into the current record-setting pipeline of new construction homes under construction in America.2023-01-09T04:00:00-07:002023-01-17T08:31:15-07:00Joe Manausatag:manausa.com,2012-09-20:33125Are you a NIMBY or a YIMBY?<img src="https://assets.site-static.com/userfiles/663/image/are-you-a-nimby-or-a-yimby.jpg" width="880" height="587" alt="NIMBY (Not In My Back Yard) and YIMBY (Yes, In My Back Yard)" title="Are you a NIMBY or a YIMBY?" class="img_box_center" />
If you spend any time monitoring social media for real estate conversations, you'll quickly discover two terms that have gained prominence over the past few years. NIMBY (Not In My Back Yard) and YIMBY (Yes, In My Back Yard) appear to be the labels that classify housing market activists into one of two camps:
NIMBY - The "not in my backyard" camp is strongly opposed to new development in or near their neighborhoods which might impact their quality of life or the value of their property.
YIMBY - The "yes, in my backyard" group has popped up as a response to the NIMBYism movement and supports adding new developments and constructing more housing units.
So, which one are you?
If you think it doesn't matter, then you are among the silent majority who will be amazed at the collapse of homeownership in America.<br /><br />How Many New Homes Are Needed?
The National Association Of Realtors has estimated the shortage of single-family and multi-family to be 5.5 million units! Let's look at a graph of housing starts in the US to give that some perspective.
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-starts-needed-december-2022jpg.jpg" width="880" height="641" alt="Graph showing the needed housing starts in the US" title="How Many New Homes Are Needed In The US?" class="img_box_center" />
In the graph above, the blue line plots the seasonally adjusted annual housing starts for each year since 1959. The red line shows the level required to avoid the current home deficit. In other words, builders produced the number of homes represented by the blue line, but we needed builders to produce the number of homes represented by the red line.
In the future, we will need to average roughly 2M housing starts annually to balance the market by 2035. So long as builder production fails to meet the demands of our growing population, we must anticipate home prices and rents rising at rates higher than the historical norm.
Building Permit Growth By State
The following interactive map was found on pewtrusts.org. It shows the percentage change in building permits issued by each state compared to 2019.
The number of homes with approved permits right now is a bit misleading. As we previously addressed in the video shown below, the supply chain disruptions from COVID have resulted in a longer construction period for new homes being built.<br /><br />
Why These Terms Matter
NIMBY and YIMBY are hotly debated viewpoints because the US has entered a home affordability crisis. With mortgage interest doubling this year and a historically low supply of homes for sale and rent, the cost of living is through the roof. And it's going to get far worse.
With rents and home prices rising simultaneously, it is clear that the number of housing units in the US is insufficient to grow our housing population. The solution to this problem is simple to understand, we need to build more homes. But that is exactly the opposite of what is happening.
The pace of home construction was crippled in 2006 when the federal government felt the housing market needed meddling and changed loan standards to where all but the wealthiest among us could afford a home. With fewer buyers, builders were forced to shut down production.
Over the years, lending standards returned to "normal," but builder production has been far too slow to keep up with the pace of population growth in most markets. As the flood of millennials entered the housing market, existing home prices and rents soared. Each year, the gap between what has been built and the need for shelter has grown. Even the homeless rate, which had declined for many years, has grown for six consecutive years.<br /><br />The Pipeline Of New Construction Has Changed
What has historically taken five to six months to build, the time it takes to build new homes today is closer to nine months.
<img src="https://assets.site-static.com/userfiles/663/image/time-to-build-a-home-december-2022.jpg" width="880" height="641" alt="What has historically taken five to six months to build, the it takes to build new homes today is closer to nine months" title="The Pipeline Of New Construction Has Changed" class="img_box_center" />
Many are worried about the size of the new construction pipeline and that it is filled with too many new homes in production. What many fail to understand, though, is that the pipeline size should be 50% larger than "normal" because it is taking 50% longer than normal to get the homes built. How do we know that the current pipeline is not too many?
Months Supply Of New Homes For Sale
<img src="https://assets.site-static.com/userfiles/663/image/months-supply-new-homes-for-sale-december-2022.jpg" width="880" height="641" alt="Graph shows the number of new homes for sale measured in months of supply" title="Months Supply Of New Homes For Sale" class="img_box_center" />
The median month's supply of new homes for sale is near an all-time low, with less than two months of supply of homes available. That's a far cry from the 14 months of supply back in 2010 and only 43% of the median months of supply recorded during the housing bubble formation years.<br /><br />A Shocked Market
The housing market is in shock right now for two key reasons.
First, mortgage interest rates doubled in a matter of months. When buyers got pre-qualified for homes at the beginning of their home search early in the year, they were blown out of the market when rates doubled in the second quarter. All the homes they had been previewing were now out of their reach.
Second, the inventory of homes continues to shrink. Even as demand continues to drop, so too does the supply of homes for sale, creating a sellers' market for the majority of price ranges in most US metropolitan areas.
As time progresses and mortgage interest rates begin to feel normal to the new buyers entering the market, we will see demand return. After all, today's rate is 14% lower than the 50-year average of the 30-year fixed-rate mortgage, so we're not dealing with crazy high rates. The real problem in housing is the production of new homes, which takes us back to the conversation we laid out in the opening of this article.<br /><br />NIMBY Versus YIMBY - The Truth About Housing Development
The YIMBY View - We need more housing for our growing population, and we should consider all options.
YIMBY is an acronym for "yes, in my backyard", a pro-housing movement in contrast and opposition to the NIMBY ("not in my backyard") phenomenon. The YIMBY position supports increasing the supply of housing within cities where housing costs have escalated to unaffordable levels. YIMBYs often seek rezoning that would allow denser housing to be produced or the repurposing of obsolete buildings, such as shopping malls, into housing. Some YIMBYs have also supported public-interest projects like clean energy or alternative transport.
The YIMBY movement has supporters across the political spectrum including left-leaning adherents who believe housing production is a social justice issue and free-market libertarian proponents who think the supply of housing should not be regulated by the government. YIMBYs argue cities can be made increasingly affordable and accessible by building more infill housing, and that greenhouse gas emissions will be reduced by denser cities. ~ Wikipedia
The NIMBY View - We should not allow anything to be built near here, we like everything the way it is.
NIMBY is an acronym for the phrase "not in my back yard",<a href="https://en.wikipedia.org/wiki/NIMBY#cite_note-2"></a> a characterization of opposition by residents to proposed developments in their local area, as well as support for strict land use regulations. It carries the connotation that such residents are only opposing the development because it is close to them and that they would tolerate or support it if it were built farther away. ~ Wikipedia
My experience has taught me that we all have some "NIMBY" blood in us if we are homeowners. After all, who wants more development (especially in-fill development) in their neighborhoods? Unfortunately, this way of thinking has led to broken housing markets all across the US resulting in soaring home prices and soaring rents. We need more homes, but the NIMBY mentality is that they need to be built "elsewhere."<br /><br />Need For Housing Is Not Going Away Any Time Soon
The US housing market is severely short of homes, and the problem is here to stay. Now that inflation has pushed the cost of new construction so high, the homes we need cannot be produced at prices most buyers can afford. There needs to be concentrated efforts at every local level to produce the shelter we need.
One has to wonder why the government feels compelled to control housing at every level. They don't seem to be so active in other industries.
For example, If there are not enough cars on the road, does the federal government get involved and make it more difficult for the automobile factories to build more cars, or do we let market forces facilitate production levels? We let the car manufacturers take the risk and reap the rewards of determining automobile production levels. Why not let homebuilders do the same for housing?
Similarly, the federal government almost always attacks a perceived housing problem by manipulating the demand side. They ease or toughen lending standards, or they raise or lower the rates on the source of funds for lenders. In my opinion, local governments need to put an equal and opposite focus on the supply side of the housing market.
The only way we can expect our local governments to treat housing as the problem that it is is by ensuring our elected officials know how disturbing the housing deficit has become. We must rally to support most YIMBY movements to produce the homes our growing population needs to rent and buy. If you have not taken the time to reach out to your local government officials demanding housing solutions, today is an excellent day to start!2022-12-26T04:00:00-07:002023-01-02T09:32:32-07:00Joe Manausatag:manausa.com,2012-09-20:32809Zillow Said What? Here's Zillow's End-Of-The-Year Take On Home Sales<img src="https://assets.site-static.com/userfiles/663/image/zillow-end-of-the-year-on-home-sales-december-2022.jpg" width="880" height="587" alt="US housing market update from Zillow December 2022" title="Zillow Housing Market Report December 2022" class="img_box_center" />
Zillow has something to say about the housing market, and it is a message reinforced with data accumulated by its massive real estate marketing machine. It's also supported by data from other sources too.
While many social media commentaries proclaim falling home prices and declining home sales, Zillow's data is clear about what is happening. Zillow is not my only source of data on the housing market, but I like to review its findings each month as Zillow is always quick to report and often months ahead of many other real estate market data portals.
Long-time readers of our blog know that we obtain housing data from numerous sources on the internet to provide a broad, unbiased view of housing market conditions, so if this is your first visit to the Tallahassee Real Estate Blog and think that I'm giving credence to Zillow or its business model, that is not the case, it is just Zillow's turn in our reporting cycle.
Today's Zillow Housing Market Update paints a clear picture that refutes what many mainstream and social media pundits have to say about the real estate market.<br /><br />
Homebuyer Activity Continues To Slow
This graph reports Zillow's estimated number of unique properties sold each month, and it shows a 14-month trend has formed.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-annual-home-sales-graph-december-2022.jpg" width="880" height="641" alt="Zillow's count of all US home sales December 2022" title="Zillow Unit Home Sales Graph December 2022" class="img_box_center" />
The blue bars plot the number of homes sold, while the yellow bars plot the year-over-year change in sales. When the yellow bars rise about the horizontal axis, unit sales grew. When the yellow bars fall below the horizontal axis, unit sales fell.
Sales through October show that for fourteen straight months, home sales declined in the US. Year-over-year sales are an important metric because it removes the influence of seasonality by comparing the same months each year. For example, the number of homes sold in October 2022 was 24% fewer than the number of homes sold in October 2021.
Though this graph only contains data since 2009, it's important to point out that the peak of home sales seen on the graph is far lower than the number of homes that were sold during the housing bubble formation back in 2004 through 2006. I point this out as a reminder to our readers that recent years were not filled with the irrational exuberance that propped up the market more than fifteen years ago.
So why have home sales slowed for fourteen straight months?<br /><br />
Mortgage Interest Rates Impact Home Affordability
This graph plots the average 30-year fixed mortgage interest rate since 1971, where the most recent months shed light on one reason for the decline in home sales.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-rates-december-2022.jpg" width="880" height="641" alt="Average monthly mortgage interest rates December 2022" title="Recent Mortgage Interest Rates Graph December 2022" class="img_box_center" />
When I was preparing this graph in early December, I checked the Mortgage News Daily website, and it reported that the current rate was 6.37%, while the one-year-ago rate was 3.25%. Interest rates are nearly double a year ago, but we've seen a 13% decline over the past thirty days.
Rising mortgage interest rates have cooled buyer demand, but can we solely blame the decline in home sales on the rise of mortgage interest rates? Here's something you don't hear from most people reporting on the housing market: Interest rates did not move above 3.3% until January of this year, yet year-over-year home sales started to slide back in September of 2021 (and those sales were fueled by sub-3% mortgage interest rates in August 2021).
Home sales started to slide when mortgage interest rates were at record lows, so we cannot solely blame the current housing market woes on mortgage interest rates. In fact, home sales fell for six straight months where mortgage interest rates were below 4%, so there has to be more to declining home sales than just an increase in mortgage interest rates.
Readers who remember the housing collapse in 2006 might be concerned that the supply of homes for sale is rising out of control. That happened in 2006, as builders were in full production mode while buyers were expelled from the market when the government changed lending requirements. Declining demand and rising supply created the bubble that sent home prices plummeting. Is that what we should expect in 2023?
The next few graphs reveal another primary cause of declining home sales and expose the potential answer for the stability of home prices.<br /><br />Why The Inventory Of Homes For Sale Is Not Growing
Zillow reports the number of unique listings active in each given month since the beginning of 2019, and what they are reporting is very different than what we saw in 2006.
<img src="https://assets.site-static.com/userfiles/663/image/real-estate-inventory-graph-zillow-december-2022.jpg" width="880" height="641" alt="Zillow's inventory of US homes for sale December 2022" title="Zillow Inventory Of Homes For Sale Graph December 2022" class="img_box_center" />
In the graph above, the blue field plots the number of homes available each month, while the red line measures the year-over-year change in inventory. Look where the red line crosses the dashed-blue line in August 2019 and August 2022, when the market shifted from inventory growth to inventory reduction and then back to inventory growth.
I have seen a lot of discussion about the anticipation of inventory growth. However, the 1% rise in listings is a minuscule amount, considering there were more than four million listings during the housing bubble years, yet today we're barely above one million homes.
Those who expect the inventory to rise rapidly as sales plummet are not accounting for the source of new listings. With new construction inventory far lower than historical norms, we must rely on discretionary sellers to fulfill our inventory needs.
The problem with expecting inventory growth is that most discretionary sellers are discretionary buyers too. When a buyer opts out of the market due to affordability, it also means a discretionary seller is leaving.
Thus a buyer leaving the market results in a seller leaving the market in more than 50% of the cases. The move-up and move-down buyers have slowed, so inventory growth is not as many have anticipated.<br /><br />Another View Of The Inventory Of Listings
This graph shows a different view of the number of listings over the past four years that sheds light on the volume reduction in inventory.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-number-homes-for-sale-december-2022.jpg" width="880" height="641" alt="graph of US home sales by month and year ending December 2022" title="Number Home Sales By Month & Year" class="img_box_center" />
The black line in the graph above plots the number of listings that entered the market each month this year. Note that there are only (slightly) more listings than last year; the number of homes for sale remains 1% lower than last year, 14% lower than two years ago, and a whopping 36% lower than three years ago. It's important to remember that those years were inventory deficient as well.
Today, the number of listings is far lower than in recent years, and all four years shown were sellers' markets, where the number of listings was far too few for the demand in the market. Demand will have to go far lower to create the supply and demand dynamic that will cause home prices to fall for an extended period. There will be markets with declining home prices because they have declining populations. Still, most US housing markets have a supply void that has slowed buyer activity, even when mortgage interest rates were below 3%.<br /><br />New Inventory Still Slowing
This graph plots the number of new listings entering the market each month for the past four years, and today is slower than ever.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-new-listings-december-2022.jpg" width="880" height="641" alt="Graph of new listings in the US for December 2022" title="New Listings Last Month" class="img_box_center" />
Even as many national news media report that home prices will crash and burn, we see the inventory drop. The only way we'll see major price declines is for supply to outrace demand, but this graph clearly shows that supply is dropping in line (or even faster) with demand.
As of today, it is safe to report that there is no sign of a growing-supply problem. Instead, the lack of supply will put further pressure on home prices.<br /><br />Median List Price Cooling
This graph plots the median prices at which homes across the US were listed and sold.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-median-list-price-december-2022.jpg" width="880" height="641" alt="Zillow's measure of the median home list price December 2022" title="Zillow Median Home Price Graph December 2022" class="img_box_center" />
The blue field in the graph shows the median list price, while the red line shows Zillow's estimate of the median home sales price during the same period.
The blue field shows a seasonal pattern on the median list price, with prices starting low at the beginning of the year, moving higher during the summer, and then falling slightly towards the end of the year. I'm seeing reports of "list prices dropping." Of course they are! The median list price falls at this time every year! Where were those reports in each of the last five years when asking prices declined in the latter part of each year?
This graph reveals two things. First, home prices generally rise, so it makes sense that end-of-year asking prices are higher than at the beginning of the year. Second, sellers who tried too high of an asking price earlier in the year ultimately reduce their prices to get sold before the end of the year. Remember, a homeowner can ask any price they like, but to get sold, they have to meet the market at the right price.
The red line shows there is no actual inner-year cycle for prices; home prices generally rise. The median home sales price had been rising faster for the past few years, but the declining number of sales has flattened to where prices are growing at more "normal" rates (the average home price growth over the past 80 years is 5.2% annually).
Additionally, one must remember that with higher rates, home affordability falls. Does the slowing growth rate of the median home price mean that home value growth is receding, or does it mean that buyers are purchasing cheaper homes?<br /><br />Zillow Expects US Home Price Growth To Slow Down
This graph is Zillow's estimate of the median home price, measuring the typical home price for single-family homes, condominiums, and co-ops in the United States. It reflects the typical price of homes in the 35th to 65th percentile. In other words, it approximates the median by swiping the middle third of the market and analyzing it over time.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-value-index-december-2022.jpg" width="880" height="641" alt="Zillow's Graph Of The Median Home Price December 2022" title="Zillow Median Home Value Index December 2022" class="img_box_center" />
If you look closely at this graph, you'll see that Zillow has reported home values from 2000 through October of next year because their dataset includes past data plus a forecast that home values will rise 1.2% over the next twelve months. Just as a reference to how conservative Zillow's estimate has become, it estimated 17.3% annual growth back in January (ten months prior).
Zillow’s Home Value Index provides a great perspective on the toxic decline in home affordability. Zillow estimates the median home price has risen more than 91% since February 2012 (an annual growth rate of 6.3%). When we compare the slope of home price growth over the past two years to the slope of price growth during the housing bubble, it is a disturbing image.
CoreLogic Is More Bullish Than Zillow
<img src="https://assets.site-static.com/userfiles/663/image/core-logic-home-price-forecast-dec-2022.jpg" alt="CoreLogic Is More Bullish Than Zillow" title="Corelogic Home Price Forecast" class="img_box_center" />
While preparing this report, I found the graph above on Twitter and added it for perspective. Corelogic believes home prices will grow by more than 4% over the next year, a level greater than three times the Zillow forecast.
One must remember that the supply and demand dynamic for homes is the key driver for the change in home prices. Today's abysmally low supply of homes has caused home prices to soar, and as we will see in our next graph, home prices are growing in 99.7% of the markets in Zillow's report.<br /><br />Year-Over-Year Home Price Growth Continues
With so many people claiming (or perhaps hoping for) falling home prices, I'm wondering if they are even monitoring what is going on across the US. This graph reports all metropolitan markets where the year-over-year change in home prices grew by 25% or more!
<img src="https://assets.site-static.com/userfiles/663/image/zillow-year-over-year-home-price-change-december-2022.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth" title="Year-Over-Year Home Price Changes" class="img_box_center" />
Of the 893 cities reported by Zillow, 890 posted growth in home prices for the past twelve months. Only three markets reported declines:
Boise City, ID Down 3.2%
Fairbanks, AK Down 6.8%
Minot, ND Down 8.1%
Overall, Zillow reports the year-over-year home price in the US has risen 13.5% since October 2021, but I'm sure some of our readers will want to say, "that's not what I'm hearing elsewhere," so let's dig a little deeper into why we're seeing so many reports of falling home prices.<br /><br />Month-Over-Month Home Prices Growing In Two-Thirds Of US Markets
This graph reports the US markets where the month-over-month change in home prices was the highest.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-month-over-month-home-price-change-december-2022.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth last month" title="Month-Over-Month Home Price Changes" class="img_box_center" />
Of the 893 cities reported by Zillow, 761 (85.2%) posted growth in home prices for the past month, while 132 markets (14.8%) reported declines. Perhaps this is why we're inundated with reports of declining home prices.
If you have seen some of my recent reports on US home prices, then you know that it is common for the median home price to stagger step higher throughout the year (or stagger step lower in a declining market). We really can't call price change trends after a few months because if we did, we would have reported declines in each of the past five years (years when the median home price soared).
It is clear that the rate of growth for home prices is coming down, but it is too early to say that we expect home prices to fall annually in most US housing markets. With 99% of markets reporting annual gains and 85% showing monthly gains, the market is clearly appreciating.<br /><br />
Rental Rate Growth Is Cooling Too
The final graph in today's Zillow Housing Report measures what Zillow refers to as the "typical observed market rental rate" and, like its Home Value Index, takes a swipe from the middle of market rents to approximate the median rental rate over time.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-observed-rent-index-graph-december-2022.jpg" width="880" height="641" alt="Zillow's measurement of the change in rental rates December 2022" title="Zillow Observed Rent Index Graph December 2022" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
The blue area measures the rental rate index each month (median rent), while the red line plots the year-over-year percentage change each month.
After peaking at more than a 17% annual growth rate in February, rents have "only" grown by 9.6% over the past twelve months.
Just as the inventory of homes for sale declined, so too has the number of homes for rent. People who must move today have no good choice between buying versus renting a home. The cost for each has exploded higher, though each is rising slower than the rates observed at the beginning of the year.
In October, the median rental rate of $2,040 was nearly 10% higher than the median rental rate of $1,861 recorded in October 2021. This is important to understand because it is not just home prices that have become unaffordable, so too have rental rates. I often receive comments from viewers on our <a href="https://www.youtube.com/channel/UC91JHHJm-D8cFDeXR1RQIBA" title="Joe Manausa Real Estate On YouTube">YouTube Channel</a> saying they are waiting for home prices to fall. I certainly understand the sentiment, but I have to wonder, where are they living while they await home price declines?
Are they waiting in a rental property where their lease renewal will be 10% higher this year after rising even greater last year? Or are they waiting in a home they own? If they are right and home prices drop, won’t the home they own drop too? This means they’ll sell cheaper to buy cheaper! So what’s the point in waiting? That’s the trouble with trying to time the housing market; either way, you’ll pay more.
The fact that both rents and prices are moving higher together confirms that the supply of homes in the US is insufficient to house our growing population. Overall, when supply is insufficient to fulfill demand, prices rise. Until we see significant output from US home builders, we should continue to anticipate rising prices (and rising rents). There will be markets where the supply of homes outpaces demand, but overall, the US housing market remains undersupplied.<br /><br />Home Affordability Crisis Continues
Home affordability is a pressing issue today. When people get priced out of the "for sale" market, they can no longer turn to the "for rent" market, as they will be priced out of that too!
When home prices crashed after the housing bubble, rents kept moving higher. That was a sign that we failed to interpret correctly, as it was a signal that despite the large inventory of homes for sale, there were not "too many" homes built in America.
The plummeting demand in the for-sale market that created the inventory imbalance was manufactured by government involvement that took away loan options for nearly all but the wealthiest of borrowers. Loan qualification standards were pushed far higher than ever in the past by a government intent on slowing a perceived "out of control" housing market.
Loan qualification standards are not an issue today. The entirety of the housing crisis lies on the inventory side, so local governments must work to solve the lack of shelter problem. The rise and dominance of the <a href="https://www.youtube.com/watch?v=9jOtFZ8sNWg" title="Who To Blame For Soaring Home Prices" data-uw-rm-brl="exc">NIMBYism</a> movement must be quelled, and we need to find solutions to increasing the number of properties to house our growing population. The problem is simple to define but very difficult to cure. It will take a level of leadership that most elected officials do not possess.<br />
You can do your part to fix our housing problems. Reach out to your local elected officials and tell them that you are not OK with soaring home prices and rents. Let them know it is purely a supply-side issue, one that requires a different plan of attack if we are to cure the shelter imbalance in America.
If you have thoughts on the limited housing supply in America, please share them in the comments section below.2022-12-12T04:00:00-07:002022-12-27T09:05:55-07:00Joe Manausatag:manausa.com,2012-09-20:30511Renter Nation Says 'Goodbye' To The American Dream!<img src="https://assets.site-static.com/userfiles/663/image/goodbye-american-dream.jpg" width="880" height="587" alt="Will skyrocketing home affordability take away the American Dream For The Working Class?" title="Say Goodbye To The American Dream!" class="img_box_center" />
Real estate is not like the stock market, yet many people who analyze housing act as if they are the same.
When investing in stocks and you fear a market correction, you can sell your stocks and sit on cash. But unless you are ready to accept homelessness, you have to make a different type of choice in real estate.
Choose to be a property owner, taking on the risks and benefits of ownership, or choose to be a tenant, reducing risks and forgoing the potential of the historical returns to your landlord.
We have seen the end of an era for the 30-year fixed rate mortgage, where for fifty years homeowners have enjoyed generally falling rates. In just the past year, we've seen mortgage interest rates grow by more than double.
This has pushed home affordability to a 30-year low and has many people waiting for something that seldom occurs, home prices falling. While they wait, investment banks are entering the single-family homes market, scooping up properties from the historically low inventory of homes for sale, making both home prices and rents rise at well-above historically normal rates.
I believe we are seeing a generational shift in the housing market that will greatly reduce homeownership and push the US towards becoming a renter nation, one in which Wall Street is in control of both home prices and rents. Needless to say, this is not good for the majority of families who need the benefits of homeownership.
<br /><br />Understanding Supply & Demand Today (Versus 2006)
There are a lot of people who share opinions on the US housing market today, but most miss or omit the key driver of home prices.
<img src="https://assets.site-static.com/userfiles/663/image/us-supply-demand-housing-december-2022.jpg" width="880" height="641" alt="Understanding The Supply & Demand For Homes Today (Versus 2006)" title="Supply & Demand Today (Versus 2006)" class="img_box_center" />
Too many people who analyze housing suffer from recency bias and await a housing market crash like the one in 2006. But a study of the supply and demand for homes makes it evident that today's market is nothing like the one observed 15 years ago.
The graph above plots the supply and demand for homes in the US. The blue bars measure the number of homes for sale in the US (reported on the left vertical axis), while the red line reports the months of supply of homes for sale on the right vertical axis. The gray dashed line displays the one-year average of the months of supply.
It is commonly considered a balanced market when there are six months of supply. When we see the supply drop below six months, it is deemed a seller's market, as there are more buyers than sellers. The opposite is called a buyers market when the months of supply push above six months.
Today's 2.5 months of supply average is barely above an all-time low, making today's housing market very strongly in the control of home sellers and having home prices moving higher at rates more than double the historical average. Additionally, the 1.2M homes on the market today are roughly 75% fewer than the 4M+ homes that were available in 2006.
So how does today's market compare with 2006? 75% fewer homes and low months of supply of homes (versus 6 months in 2006, which was accelerating rapidly). When people analyze the market, they see homes far less affordable than what has been enjoyed for the past 30 years, so they assume home prices must come down. But supply and demand control home prices and today's historically low supply has caused both home prices and rents to soar, so a collapse in home prices is hard to imagine.<br /><br />
How The New Construction Premium Has Changed
With the market needing more homes, you might think that homebuilder production will come to save the day. That has not been the case, the US has been deficit building for the past fifteen years, leaving the US short as many as 5 million homes. So why aren't builders delivering more homes?
<img src="https://assets.site-static.com/userfiles/663/image/new-construction-premium-december-2022.jpg" width="880" height="641" alt="How The New Construction Premium Has Changed Since 2002" title="The New Construction Premium December 2022" class="img_box_center" />
The short answer is that buyers cannot afford what builders can build.
The graph above was created from data pulled from the Tallahassee Board of Realtors MLS, but it mirrors what you will find in most US housing markets. It calculates the "premium" that buyers must spend to purchase a new home versus an existing home. The red line plots the five-year average new home cost (measured in price per square foot of heated and cooled space) while the blue line does the same for existing homes.
In the 1990s and up through 2010, the premium for new construction was typically near 10%. But inflation kept pushing the cost of building new homes higher while the housing bubble and recession brought down the value of existing homes. By 2016, the new construction premium had soared above 50%, and even as the market stabilized and new homes were needed, builders could not compete with the existing homes market.
With inventories tight, existing home values surged higher at alarming rates, and we have seen the premium drop to just above 32%, still far higher than what we had seen in the past. Today's soaring inflation, coupled with supply chain disruptions related to the COVID pandemic, have pushed the cost of building so high that the premium is only slowly falling.
Every year that we produce too few homes only adds to the deficit of available shelter for both buyers and tenants alike, and this has drawn the interest of large investment funds and investment banks who seek the stable cash flows that rental properties provide. They can borrow relatively cheap money and invest it into homes delivering great rental rates plus value appreciation driven by inflation and the lack of available shelter for our growing US population.<br /><br />Mortgage Interest Rates Today (Versus 2006)
When we study mortgage interest rates for the past fifty-plus years, we find that a long-term trend appears to have ended.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-interest-rates-history-december-2022.jpg" width="880" height="641" alt="Mortgage Interest Rates History Graph December 2022" title="Mortgage Interest Rates Graph" class="img_box_center" />
The blue bars in the graph above plot the average monthly 30-year fixed mortgage interest rate since the beginning of 1971. The solid yellow line plots the fifty-year average rate, and you can see that roughly 1/2 of the months were above that line while 1/2 of the months were below the line.
Perhaps the most intriguing trend is plotted as an orange-dashed line showing how since 1980, rates generally declined until hitting a market low in December of 2020. Let me tell you what this means and why we're now facing a multi-generational change in the housing market.
Anybody who purchased a home in the late 1970s or later, all the way through recent years, generally found lower mortgage interest rates when it was time to sell their home and buy another. If they applied their equity from the sale of their home to the subsequent purchase of the next one, the lower rates allowed them to "move up" to a better home while keeping their monthly mortgage obligation pretty close to where their last payment had been.
For more than forty years, move-up buyers have been supported by falling mortgage interest rates, but I fear that those days are over. Interest rates are cyclical, and there is plenty of reason to believe that we're now heading into an era of generally rising mortgage interest rates. Rising mortgage interest rates mean that while move-up buyers will have the equity from the sale of their homes, they might be priced out of buying a nicer home because the cost of the home (and, more importantly, the rising cost of money) will price them out of the move.
Home Equity Has Fueled The US Economy
Another unfortunate outcome of rising mortgage interest rates will be untappable equity for young homeowners. Just as rising rates will squash many move-up buyers, so will homeowners who want to pull equity from their homes. Tenants have never enjoyed the luxury of spending their equity (as they do not create equity for themselves), but now homeowners will sit on a pile of equity, much of it beyond their reach due to the cost of borrowing money.
How much of the US economy has been buoyed by spending from homeowners tapping their equity, I couldn't say, but I cannot imagine things remaining the same when the cost of refinancing becomes greater than a homeowner can afford.
How much of the US economy has been carried by cheap money? That's another question I cannot answer, but again, I cannot imagine things remaining the same when the cost of refinancing becomes greater than a homeowner can afford.<br /><br />Goodbye To The American Dream?
Homeownership has been a major tenet of the American Dream since the end of World War II, but home affordability declines coupled with the aggressive acquisition of homes by large investment banks could make homeownership too difficult for most American families.
Homeownership has allowed families to build wealth and develop a measure of financial security for over eighty years, but without sweeping changes in how local governments perceive their roles in facilitating "the dream," I have little faith in its future. It will take strong leadership from elected officials and constant reminders to the <a href="https://youtu.be/9jOtFZ8sNWg" title="Who's to blame for soaring home prices?">NIMBY</a> crowd that homeownership is an important element in personal wealth and a major factor in the overall health of the US economy.
When you take away the ability to own and afford a home, you reduce a family's chances of improving its financial wherewithal, and you strengthen the ability of a handful of large funds to control home prices and rents. The US housing market remains one of the last local Mom and Pop industries not yet conquered by Big Business. You can do your part by being a vocal advocate of property rights and smart development in your local community. I hope to hear your voice ring loud and clear, supporting the American Dream!<br /><br />US Annual Home Sales
With the shock of exploding mortgage interest rates impacting the housing market, we find sales falling as many of the discretionary buyers have left the market.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-sales-new-existing-december-2022.jpg" width="880" height="641" alt="Graph of new and existing home sales in the US December 2022" title="US Annual Home Sales December 2022" class="img_box_center" />
This graph plots annual home sales. The blue bars count the number of existing home sales, while the red bars count the number of new home sales.
The significant decline in 2022 is hidden because first-quarter sales were very strong. The decline in sales that commenced with April's rising mortgage interest rates will be far more obvious when we start reporting 2023 home sales.
The number of sales today remains lower than in the bubble formation years, suggesting that fewer buyers were purchasing for flips (investors) than what was observed in 2003-2006. Last year's sales were the most recorded in 15 years, but still fewer than each of the years from 2003 through 2006 when "irrational exuberance" was a term used to describe investment activity in the housing market.
Expect to see fewer buyers in the market next year, unless the big investment banks accelerate their acquisitions in the single-family homes market.<br /><br />Slow Pace Of New Construction
While there are some reports of high levels of new construction, they are not supported by facts in the overall US housing market.
<img src="https://assets.site-static.com/userfiles/663/image/new-housing-units-completed-december-2022.jpg" width="880" height="641" alt="More than 50 years of new housing units completed by builders" title="Builder Homes Completed December 2022" class="img_box_center" />
This graph plots the number of new homes completed each month with a blue dot. The blue line shows the one-year average of monthly new homes completed, while the red line plots the 10-year average of monthly new homes completed.
This is one of those times when a picture is worth 10,000 words. The ten-year average monthly homes completed line shows that even with the recent rise in new construction, the US is producing homes at a rate LOWER than what we saw in the 1960s through 2005. The reduced inventory of homes in both the for-sale and the for-rent markets has caused prices and rental rates to soar, and Wall Street has noticed and has taken action.
Imagine a future where only large investment banks can afford to buy homes, happy to lease them to people with great credit who can no longer afford to buy homes. We'll see people forced to pay a higher percentage of their income to have a nice place to live, and the profits from landlording will be shared with a much smaller segment of our population than what has occurred for the past 80 years.2022-11-28T04:00:00-07:002022-12-24T13:49:09-07:00Joe Manausatag:manausa.com,2012-09-20:32410Foreclosure Starts Are Changing: What It Means For Housing<img src="https://assets.site-static.com/userfiles/663/image/foreclosure-starts-are-changing-what-it-means-for-real-estate.jpg" width="880" height="587" alt="Foreclosure Starts: The best way to start to analyze the "coming wave" of foreclosures is to break down the current pipeline of loans and observe forming trends" title="Foreclosure Starts Are Changing: What It Means For Housing" class="img_box_center" />
Fire up YouTube and search "foreclosure," and you'll find some daunting headlines. "371% SURGE in FORECLOSURE Starts," Foreclosure Report - SHOCKING," and "No Escape - Foreclosure's Now Coming," just to name a few. Is this something we really need to worry about?
The best way to start to analyze the "coming wave" of foreclosures is to break down the current pipeline of loans and observe forming trends. But that's not enough. We also need to study home prices, the inventory of homes for sale, mortgage interest rates, and the economy (specifically employment rates).
Today's quarterly analysis of the mortgage market (relying heavily on the Black Knight Mortgage Monitor) yields everything you need to know to be prepared for the impact of foreclosures on the US housing market.<br /><br />Overview Of The US Mortgage Market
The first chart in our report is an overview that Black Knight uses on its cover of September's "Mortgage Monitor."
<img src="https://assets.site-static.com/userfiles/663/image/black-knight-mortgage-monitor-november-2022.jpg" width="880" height="641" alt="Report on the status of US home loans over time" title="Black Knight Mortgage Monitor November 2022" class="img_box_center" />
The mortgage delinquency rate fell yet again to 2.78%, well below pre-pandemic levels, and just 3 basis points off of May's record low. This should be a bit surprising to people watching the hype-videos on YouTube.
So let's examine what Black Knight reports about our headline (Foreclosure Starts Are Changing).
Black Knight reports that foreclosure starts dropped more than 9%, and September's 18K starts remained 53% below pre-pandemic levels.
As a reminder on tracking foreclosure sales, we track starts (the beginning of the foreclosure process) and foreclosure sales to get an early warning on growth in the foreclosure pipeline. Most starts do not result in a foreclosure sale, but it is still good relative information to track.
So foreclosure starts are changing, just not how the hypesters want you to believe they are changing.
Prepayment activity is down 73% year-over-year (versus September of last year), not surprising as mortgage interest rates have doubled + in that time span, reducing the benefit of refinancing for most homeowners. The dwindling supply of distressed property (coupled with rising mortgage interest rates) has cooled the refinance activities that had been the top solution for delinquent borrowers.
Before we move on, let me emphasize the importance of each graph in today's report. These graphs contain the FACTS while ignoring the hype that most online reports present in order to gain views.
National Delinquency Rate On First-Lien Mortgages
This graph plots the national delinquency rate on first-lien mortgages, demonstrating very positive trends in the US mortgage pipeline.
<img src="https://assets.site-static.com/userfiles/663/image/national-mortgage-delinquency-rate-november-2022.jpg" width="880" height="641" alt="National First Lien Mortgages Delinquency Rate November 2022" title="National Mortgages Delinquency Rate November 2022" class="img_box_center" />
In the graph above, the dark line plots the quarterly delinquency rate, the light-green line plots the average recorded from 2000 through 2005, and the gray line plots the record-low delinquency rate. Black Knight provides the 2000 to 2005 average as a reference to what the market looked like before the housing bubble so that we have a basis to forecast the next similar market behavior. Here's what Black Knight reports:
The national delinquency rate fell to 2.78% in September, down one basis point from August, and just 3 basis points off the record low set in May earlier this year.
The delinquency rate decline in September ran counter to the typical growth of 27 basis points that was averaged from 2000 to 2005.
The national delinquency rate is now 41% lower than the pre-Great Recession September average of 4.66%.
These three observations demonstrate a strong current housing market in terms of distressed properties and rebuffs claims that a flood of foreclosures is heading our way. But let's dig deeper!
Current Delinquencies By Severity
This graph segments mortgage delinquencies by severity.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-delinquencies-by-severity-november-2022.jpg" width="880" height="641" alt="Serious Mortgage Delinquencies November 2022" title="Serious Mortgage Delinquencies November 2022" class="img_box_center" />
The number of 30-day delinquencies rose by 1% last month, while the 90-day delinquent loans fell 1.5% and are now only 24% above pre-pandemic levels. Foreclosure starts declined by 9% to 18.4K, holding the line at 3% of serious delinquencies in September, down slightly month over month and less than half of pre-pandemic levels.
An important point that most YouTube Hypsters either fail to understand or perhaps purposely overlook in their reporting is that the market anticipated much greater foreclosure activity this year due to a stockpile of delinquent loans that were not addressed over the past two years. Once COVID hit in March 2020, lenders were not allowed to foreclose on most home loans that were delinquent during the pandemic until this year, so the decline in foreclosures is the opposite of market expectations (we address the "why" later in the report).
The total number of delinquencies has been reduced by more than half since the start of the pandemic two years ago, and delinquencies are now lower than pre-pandemic levels (teal line). Serious delinquencies (those that have been delinquent for more than 90 days) continue to fall and are approaching the pre-pandemic level.<br /><br />Forbearance Plans Failed To Kill Housing
Forbearance plans are agreements between borrowers and lenders that, for a set period, allow the non-payment (or partial payment) of a loan to help borrowers retain their homes. Many lenders used the forbearance process as a quick fix when COVID hit the US, and more than 8.4M borrowers entered into forbearance agreements with their lenders. It was not long ago that hypesters on YouTube claimed that Forbearance Plans would lead to millions of foreclosures (which would kill the housing market).
<img src="https://assets.site-static.com/userfiles/663/image/active-forbearance-plans-november-2022.jpg" width="880" height="641" alt="Active Forbearance Plans November 2022" title="Active Forbearance Plans November 2022" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
This graph plots the number of loans on active forbearance plans. There were nearly five million borrowers who went into forbearance at one point early in the pandemic. Forbearance leading to foreclosure was all the hype on YouTube for more than a year, but it never materialized. None of the YouTubers considered the other factors involved, like equity in the housing market and the diminished supply of homes for sale.
The 515,000 remaining borrowers on forbearance plans are 20% fewer than what we reported three months ago and now measure at just 1% of all active mortgage loans in forbearance.
The remaining pipeline of loans in forbearance should decline by about 70K per month and soon be a footnote in the housing market history. As you'll see in the following pie chart, the Forbearance plan was successful in protecting homeowners during the initial days of the pandemic.<br /><br />COVID Related Forbearance Plans Did Not Destroy Housing
This pie chart reveals what happened to the 8.3 Million loans in forbearance that were COVID related.
<img src="https://assets.site-static.com/userfiles/663/image/status-forbearance-plans-november-2022.jpg" width="880" height="641" alt="COVID Related Forbearance Plans Did Not Destroy Housing November 2022" title="COVID Related Forbearance Plans Did Not Destroy Housing November 2022" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
8.3M borrowers have been in forbearance at some point since the onset of the pandemic. 93% have since exited their plans, with more than half returning to making mortgage payments one-third have paid off their mortgages in full, six percent on still on their plans, 7% are working through loss mitigation, and just 1% (94,000 loans) are in foreclosure.
For all those reporters who came forward with foreclosure warnings when loans en masse went into forbearance, I'm curious about what they were thinking. The US housing market is flush with equity, so it was not likely to see foreclosures even as a worst-case scenario. For the majority of those that were not able to make the payments on their homes, they could have sold their homes, paid off the debt, and walked away with a good deal of money.
This is what I reported right after the forbearance plans went into effect, yet most other "experts" were expecting (or at least proclaiming) that the market would collapse. False or ignorant reporting is rampant across every industry, as anybody can post an opinion online. My recommendation: Stick with the facts and ignore the hype!<br /><br />Black Knight Home Price Index
The following graph is the Black Knight Home Price Index, it parallels the results from several other data sources that I use.
<img src="https://assets.site-static.com/userfiles/663/image/black-knight-home-price-index-november-2022.jpg" width="880" height="641" alt="Black Knight Home Price Index November 2022" title="Black Knight Home Price Index November 2022" class="img_box_center" />
This graph plots the 1-month percentage change in home prices in blue (recorded on the right vertical axis) and the annual home price growth rate in green (recorded on the left vertical axis).
Housing market watchers are split on whether we will see meaningful price declines in coming months – or even years – due to low affordability or a more lateral correction moderated by historically low inventory.
September’s data brought fodder for both sides of the debate, with home prices slipping for a third consecutive month, but at 0.52%, less than half the monthly declines seen in July and August.
All in, prices have fallen 2.6% since June – the first 3-month decline since 30-year rates spiked to nearly 5% in late 2018 and the worst 3-month stretch since early 2009. Over that same 3-month span, the median home price fell by $11,560. Annualized appreciation slowed to 10.7%, still more than twice long-term norms, and while indicative of continued correction, the 1.2% decline from August is the smallest seen in four months.<br /><br />Home Price Growth Rates
We know that real estate is local, and that means price changes might be different in your area than they are in others.
<img src="https://assets.site-static.com/userfiles/663/image/home-affordability-by-city-november-2022.jpg" width="880" height="641" alt="Home Price Growth Rates by city November 2022" title="Home Price Growth Rates By City" class="img_box_center" />
The two tables above list the most (and least) affordable cities when comparing payment-to-income ratios.
The first thing that caught my attention is that more than half of the least affordable cities are in California, while none of the most affordable cities are located in California. I often get comments on our YouTube channel telling me I'm wrong on home prices, and when I ask most of them where they are from, it's usually a western-state.
It's important to study trends in the US housing market, but make your purchase and sale decisions based on local housing market data.<br /><br />Home Affordability Is Bad, But It's Been Worse
One way to measure home affordability over time is to examine the ratio between monthly mortgage payments and borrowers' income, we refer to this as the payment-to-income ratio.
<img src="https://assets.site-static.com/userfiles/663/image/payment-to-income-ratio-housing-nov-2022.jpg" width="880" height="641" alt="National Payment To Income Ratio shows home affordability tanking November 2022" title="National Payment To Income Ratio November 2022" class="img_box_center" />
This graph plots the National Payment-to-Income Ratio. It is measured as the share of median income needed to make the monthly principal and interest payment on purchasing the average-priced home using a 20% down, 30-year fixed-rate mortgage at the prevailing interest rate.
With 30-year rates nearing 7%, it takes ~39% of the median household income to make the principal and interest (P&I) payment on the average-priced home purchase, the highest such share since 1984 and well above the long-run average of just under 25%.
The last time affordability was this tight, 30-year rates were over 13%, roughly twice today's 30-year fixed mortgage interest rate. Buying power has been cut an additional 14% by rate increases even as home prices have pulled back from June 2022 peaks and today's buying power is now down 38% from last year.
The monthly P&I payment on the average home purchased with 20% down is up $937, marking the sharpest annual rise on record dating back to the mid-1970s.
Since the data for this graph was pulled in late October, we have seen mortgage interest rates come down nearly 1/2%. Regardless of today's exact rate, the US housing market continues to run extremely tight from an affordability perspective.<br /><br />Low Supply Of Homes For Sale
One way to forecast future home prices (as well as the likelihood of a foreclosure crisis) is to evaluate the existing supply of homes for sale and compare it with the current demand rate.
This graph plots the current supply and demand for homes in the US. The blue bars measure the number of active home listings on the left vertical axis, while the red line plots the months of supply of homes by using current sales data (and reported on the right vertical axis). Finally, the gray dashed line measures the one-year average of the months of supply.
<img src="https://assets.site-static.com/userfiles/663/image/us-supply-existing-homes-june-2022.jpg" width="880" height="641" alt="Is The Supply Of Homes For Sale Finally Rising?" title="Supply Of Existing Homes For Sale" class="img_box_center" />
Unfortunately, we still see the trend falling in the supply of homes relative to the current demand rate. The numerous reports across the internet warning of rising inventories are either wrong or very local to specific markets (which we address below).
Currently, the supply of homes for sale (relative to the current demand rate) is still falling. When we look at the far right of the graph, the blue bars show that the current inventory of homes is right at one million homes.
Contrast today's supply with the four million plus homes in inventory at its highest point back in June 2007. That means today's supply is 75% lower than the market observed at its peak and lower than at any time going back 23 years. It's very hard to anticipate a near-future rush of foreclosures when the market is clearly in control of home sellers.
US Annual Home Price Growth Change By Metropolitan Area
Annual home price growth rates are universally coming down across the country, though some markets are proving to be more resilient than others.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-price-growth-by-cbsa-november-2022.jpg" width="880" height="641" alt="US Map Of Home Price Changes By Metro Area 2022" title="US Map Of Home Price Changes By Metro Area 2022" class="img_box_center" />
What many confuse (when discussing falling home price growth rates) is that most markets are NOT seeing falling home prices; rather, they are seeing the rate at which home prices grow coming down. One extreme example is Miami, FL (bottom right on the graph), where the growth rate is DOWN to 23% year-over-year!
Migratory inflow and a corresponding lack of inventory continue to put upward pressure on prices in such markets.
If prices held steady at their current levels, it would take until early February or March 2023 for the annual home price growth rate to hit its long-run average and until April for price growth to be down year over year.<br /><br />Equity In The Housing Market
This next graph was not part of the Black Knight report, but it reveals why we’re not worried about a foreclosure crisis today and why the current market is vastly different from conditions observed in 2009.
<img src="https://assets.site-static.com/userfiles/663/image/equity-housing-market-january-2022.png" width="880" height="641" alt="Equity In The US Housing Market January 2022" title="Equity In The US Housing Market January 2022" class="img_box_center" />
The graph above plots both equity and debt in the housing market, and all we need to do is a "now versus then" study to see why today's environment is so different from the housing market recovery more than ten years ago.
From 2006 through 2014, there was no equity in the housing market. Simply put, Americans owed more on their homes than the homes were worth. If a homeowner became delinquent, no solution made lenders whole again. Foreclosures resulted in losses to the borrower and the lenders.
Today is completely the opposite. There is equity again in the housing market, and more so than at any time in the past! For most borrowers who become delinquent today, the remedy does not have to be a foreclosure sale. Instead, delinquent borrowers can sell their homes on the open market, repay their debt, and many will walk away with cash!<br /><br />My Real Concerns For Housing
The Black Knight continues to report the supporting data that demonstrates foreclosures are not a concern for the US housing market. Again, I reiterate that there IS a housing crisis, but it is not one of defaults and foreclosures; rather, it is one of historically low supply, soaring home prices, and soaring rents, all leading to the devastating decline of home affordability.
I expect to see people with great credit being forced into the “for rent” market simply because there are not enough homes to be found at affordable prices. This increase in demand in the rental market will continue to push rents higher at an unhealthy rate, and we’ll see lower-wage earners struggle to find adequate housing.
Wall Street is making a big push into housing, and what has traditionally been a greatly decentralized housing market will see “BIG BUSINESS” gain market share, leading to implementing controls that will make it harder for many Americans to afford a home. Big corporations like Amazon are not only hurting local retail businesses, they are now attacking housing, perhaps the last of the untouched small business community.
Foreclosures and forbearance loans were protected by rising prices and diminished inventories of homes for sale, but what will protect us from Big Business coming in and buying up a large segment of our local housing markets? This should be your primary concern for housing, not the distracting hype about foreclosures, forbearances, and prices crashing.
If you think I’ve presented a sound argument in this video, please share it with your close friends and family. If you think I’ve missed something important, please tell me how by posting a comment below.<br /><br />Recession Or Recovery?
Whether or not you believe that the US is in a recession (after all, the "experts" do not agree), you have to acknowledge that there is ample fear about the stability of the US economy. Regarding real estate (and home sales in particular), I focus on employment, as most people rely on their earnings to pay for housing.
<img src="https://assets.site-static.com/userfiles/663/image/unemployment-rate-graph-november-2022.jpg" width="880" height="641" alt="Graph of the national unemployment rate November 2022" title="national unemployment rate November 2022" class="img_box_center" />
This graph plots the average annual unemployment rate for each year since 1991. The blue dashed line reveals that the average unemployment rate for the past 31 years is 5.8%, a whopping 58% higher than this year's average of 3.66%. Looking closely at this year in the graph, you'll see that we are very near a 30-year low.
The economy might be in grave danger, or perhaps it's the best it's ever been. What I know is that a high percentage of people have jobs, and continued high employment levels will likely work to push home prices (and rents) even higher.2022-11-21T04:00:00-07:002022-12-24T13:49:38-07:00Joe Manausatag:manausa.com,2012-09-20:31972If it Bleeds, It Reads: Real Estate Headlines Are Often Deceptive<img src="https://populardownloads.s3.amazonaws.com/Pictures/how-is-the-housing-market.gif" width="880" height="495" alt="Shocking headlines make you wonder how is the housing market" title="How is the housing market?" class="img_box_center" />
Old newspaper folks used to say, "if it bleeds, it reads," meaning that to get readers, headlines must include death, violence, or conflict. Well, it appears as if today's YouTubers and reporters have taken that advice to heart.
Headlines for the housing market are bleeding today. Both mainstream and social media call for the collapse of the housing market, but I have yet to find one piece of housing market content that digs to the heart of the matter, the "why" for a housing market collapse.
Many spout obvious issues but never tie together the cause-and-effect relationships that will bring the forecast results.
For example, interest rates are soaring, so we're seeing a lot of reports claiming that home prices will fall due to soaring rates. While this could be true, rising rates alone do not cause prices to rise or fall. With this in mind, I want to uncover the essential truth about today's housing market since it is the one thing that none of these alarmists are addressing.<br /><br />
The Truth About Home Prices
Today, we'll focus on the US housing market, but I must remind our readers that real estate is local. This means that while many US trends will affect us locally, it is the supply and demand for homes at the local level that will determine the direction of home price changes.
Much of the US housing market remains grossly undersupplied with homes. Last week, I used data from the Zillow website to show that 891 out of 894 local housing markets are reporting year-over-year increases in home prices, yet most new stories lately have been centered on the fact that home prices are falling.
I went further to show how home prices rose from August to September in more than 86% of those same market areas, yet the mainstream and social media continue to report otherwise. It's as if they have an agenda beyond reporting what is going on.
If it bleeds, it reads, and one finds this truth by looking at the views on YouTube. Some of the hottest headlines include:
Home Prices Falling Big Time
Housing Crash Spreading
Why 2023 Will Be Worse Than 2008
Home Prices To Fall 45%
Home Prices DROPPING FAST on Zillow
But here is what none of these videos and reports are including.<br /><br />The Supply And Demand Dynamic For Housing
Nobody seems to feel it necessary to address the supply and demand for homes.
At the local level, there are metropolitan areas where populations are shrinking. If people are moving away, one might expect the supply of homes for sale to rise to a level where prices could fall. Other locales have growing populations, and they need more homes. Overall in the US, the months of supply of homes for sale remains near an all-time low.
Let's start with a few points about the theory of supply and demand:
The law of demand says that at higher prices, buyers will demand less of an economic good.
The law of supply says that at higher prices, sellers will supply more of an economic good.
These two laws interact to determine the actual market prices and volume of goods that are traded on a market.
Several independent factors can affect the shape of market supply and demand, influencing both the prices and quantities that we observe in markets.
The housing market is no different than any other market, and it adheres to these points completely. But it is the fourth point that I think is confusing most people, in that multiple factors influence the housing market's supply and demand dynamic. Numerous factors lead many to believe that home prices will fall, yet nobody accurately “completes the loop” to show how certain factors will first impact the supply or demand for homes. Let's look at a few examples.
<br /><br />Home Affordability Has Hit A 30-Year Low
First and foremost on most people's list is that homes are less affordable today than they have been since 1991 (<a href="https://www.manausa.com/blog/wage-inflation-home-affordability/" title="Wage Inflation & Home Affordability">see my recent report on wage inflation-adjusted monthly mortgage payments</a>). Most reason that since "nobody" can afford these homes, home prices must come down to a more affordable level. I certainly understand that logic.
<img src="https://assets.site-static.com/userFiles/663/image/wage-inflation-adjusted-home-affordability.jpg" width="880" height="641" alt="Graph shows home affordability adjusted with wage inflation" title="Home Affordability Graph" class="img_box_center" />
The graph above plots the median home price in blue, the monthly mortgage payment on that median home in green, and then the wage inflation-adjusted mortgage payment is plotted in red. Today's adjusted payment is as affordable as homes in 1990. It's funny, I got into the business in 1991, and nobody was writing about home affordability back then. We are moving to a future where cheap mortgage interest rates won't drive the housing market.
Regardless, there have been thousands of videos and articles published that declare home prices must (and will) come down due to the decline in affordability. But what if there is other data to contradict this simplistic logic?
For example, we know we are in a high inflationary economy, with the price of all goods and services pushing higher. Do we expect houses to defy inflation? I'm not saying it cannot happen, but I am saying that it WILL NOT HAPPEN until the supply of homes is far greater than the demand for those homes. It is that simple.
So we can look at wage inflation (making homes more affordable) and building materials inflation (making homes less affordable) and push to find the smoking gun that will impact the supply and demand for homes.<br /><br />The Supply-Side Litmus Test
Long-time readers of the Tallahassee real estate blog know that I refer to rental rates as the litmus test for the supply and demand relationship in the for-sale side of the market. If rental rates rise, we know that the rental market is either balanced or undersupplied.
<img src="https://assets.site-static.com/userfiles/663/image/rental-rates-october-2022.jpg" width="880" height="641" alt="Rents continue higher at an alarming rate" title="Rental Rates October 2022" class="img_box_center" />
Today's rental market is as low in inventory as the for-sale market, and rents are up 24% in the past two years. This means that as people get priced out of the for-sale market, they are finding no relief in the for-rent market. This is not necessarily a big deal for people who own homes and are happy where they are. But for people who must make a move (marriage, divorce, change in family size, relocation, etc.), their choices are not good.
The rental rates graph is the litmus test that tells us the lack of supply in the for-sale market is not going away. We have too few homes for rent and sale, and our growing population needs shelter. If you want to know who to blame (or how we got into this mess), you can check out the video below.<br /><br />What Happens To Home Prices When Interest Rates Rise?
Many reports have noted that mortgage interest rates have doubled (plus) over the past year, and many expect them to continue higher for the foreseeable future. But do rising mortgage interest rates bring down home prices?
<img src="https://assets.site-static.com/userfiles/663/image/interest-rates-versus-home-prices-october-2022.jpg" width="880" height="641" alt="Graph shows what happens to home prices when mortgage interest rates rise" title="What Happens To Home Prices When Interest Rates Rise?" class="img_box_center" />
This graph plots the US median home price in blue and the average monthly mortgage interest rate in red. The red boxes identify 11 times in the past fifty years when mortgage interest rates rose, and home prices rose too. There is no correlation between rising rates and declining prices. Instead, one might argue the opposite.
In reality, the simple reason is that home prices generally rise.<br /><br />What Must Happen For Home Prices To Fall?
The only way that we are going to see long-term home price declines during this inflationary period is a dramatic change in supply, demand, or both. YES, rising mortgage interest rates have cooled buyer demand, but you must understand what segment of the buyer pool has been cooled.
Discretionary buyers, those that have no real pressure to make a move, represent the majority of those who have opted out of the market. So why is this important to the supply and demand for homes?
It's the move-up, move-down, and move-over discretionary buyer who also has a home to sell. This means when a discretionary buyer leaves the market, so too does a discretionary seller. This does NOTHING to fix the supply imbalance, it just reduces the number of homes sold in a year.
Discretionary buyers (and sellers) will move when they are comfortable with market conditions, but non-discretionary buyers have a choice to make. They can buy a home. They can rent a home. Or they can live in the streets (US homeless rate has risen 6 years running, this is not a coincidence). None of those choices is attractive today.<br /><br />Housing: A Binary View
To fix the housing market, it comes down to increasing supply, reducing demand, or a combination of the two. Remember, both prices and rents are rising, so you will not reduce demand by pushing a consumer from one side of the market to the other. When we talk about housing, we're talking about shelter, whether the consumer is buying or renting.
<img src="https://assets.site-static.com/userfiles/663/image/us-supply-demand-homes-october-2022.jpg" width="880" height="641" alt="The supply and demand for homes in the US" title="Real Estate Supply & Demand" class="img_box_center" />
This graph plots the number of homes for sale in blue, the months of supply in red, and the dashed-gray line measures the non-seasonal relative supply of homes.
The first point I will make is that the 1.3 million homes for sale today is 68% fewer than the 4 million homes that were available when the housing market tanked 15 years ago. The one-year average months of supply of homes has risen off an all-time low three months ago, but the US is far from approaching equilibrium. There are not enough homes built to house our growing population.
There are not enough homes, even for the lowered demand that has resulted from skyrocketing mortgage interest rates.
Supply Side
If one looked to the supply side of the housing market to balance with demand, more shelter is needed. Apartments, condominiums, and single-family homes are all needed. I have seen estimates that the US is deficient somewhere between 2.5M and 5M homes right now, and each year that we under-build for demand only exacerbates the problem.
Of course, things could change on the supply side. For example, what happens when a force majeure hits our population? As a dark, extreme example, think of how the supply and demand dynamic would have been impacted had 10% of our population (33M people) been killed by COVID since the pandemic began more than two years ago. Had such a tragedy occurred, it would have, on average, resulted in the addition of 12M homes to the supply side of the housing market.
Our market would have gone from grossly undersupplied to grossly oversupplied in a very short period. Today, we would have 14M homes for sale in the US (where we have averaged about 6M sold each year). Considering the market in 2007 had "only" 4M homes, you can see how devastating the pandemic could have been to the supply side of the market.
I have seen reports stating a large number of new homes are ready to flood the market. This is not true. The pipeline is taking 50% longer than the historical norm due to supply chain disruptions. Thus there are more (but not enough) homes in the pipeline. You can view an in-depth video below on the new construction pipeline.
I have also seen ignorant reports stating that the supply side of the market could change greatly if more current homeowners decide to move. Here's why this is ignorant. Real estate math: One seller enters the market. Unless that person dies or moves to another country, one buyer (or tenant) enters the market.
One new seller plus one new buyer equals a net zero for inventory! No more houses are added. No more consumers are added. You cannot detach the inventory of homes for sale from the inventory of rental homes, as each represents a part of our inventory for shelter.<br /><br />Demand Side
The demand side of the housing market has two key variables to consider. Mortgage interest rates and jobs.
I think it is safe to assume that mortgage interest rates will remain well above 6% for the foreseeable future. It would not surprise me to see them surge above 8% before year's end as (I suspect) the Fed will be pushing the funds rate higher two more times this year.
I also believe that the US is in, or is heading into a recessionary period. This too will slow demand as (perhaps) one to two million workers lose their jobs.
The former will impact discretionary buyers, while the latter will impact both discretionary and non-discretionary buyers. As a reminder, discretionary buyers are typically discretionary sellers too, so I am more concerned about the economy than I am regarding mortgage interest rates. So long as the US holds on to jobs, I believe home prices will be fairly well protected.<br /><br />Real Estate Is Local
When you hear that real estate is local, it means that the supply and demand dynamic for homes centers around the population of people who might want to live in those homes. The local economy and the changes in an area's population (growing or receding) will have the greatest impact on the demand for homes.
This means that home values are relative to those of homes around them. That's why you might pay $2M for a tiny apartment in New York City and yet only spend $500K for a 3,000-square-foot home in Tallahassee. These two cities have two very different markets, two completely different sets of buyers and sellers, thus one has no direct impact on the other.
Relative location is also why you can buy a townhouse on Hilaman Golf Course in downtown Tallahassee for $200K less than one in Golden Eagle Plantation, located in Northeast Tallahassee. Real Estate values are hyper-local. Nevertheless, it is important to study the supply and demand for homes in the US. The data is more readily available to most people, and housing is often manipulated at the Federal level in order to tweak the economy. Federal tweaks impact local values too.
Don't Be Sucked In By The Next Hype Headline
I hope today's housing report has given you an understanding of how the supply and demand for homes in your area will determine home price changes. How is your local economy? Is your population growing? Declining? These are the issues you must understand to forecast home prices in your local market area.
For the US as a whole, we don't have enough homes. Home affordability is tanking, and it appears that wage inflation might be the only savior for people who need to move. Rents are rising. Home prices are rising. In fact, due to inflation, just about everything is rising.
Don't let the next headline shock you. Instead, ask yourself, "If what the headline suggests is true, how will it impact the supply and demand for homes?"
The supply side of the housing market remains far too low for even today's lowered rate of demand. Consequently, we should expect most local market areas to continue to struggle against rising home prices and rising rents.2022-10-24T03:00:00-07:002022-11-01T07:08:03-07:00Joe Manausatag:manausa.com,2012-09-20:31857Zillow Exposes Mainstream Media On Home Prices<img src="https://assets.site-static.com/userfiles/663/image/zillow-housing-market-update-oct-2022.jpg" width="880" height="587" alt="US housing market update from Zillow" title="Zillow Housing Market Report October 2022" class="img_box_center" />
Home prices are crashing! Wait, no, I heard that home prices are rising. What's going on in this crazy housing market?
In order to dig into what's going on in housing, I've spent some time gathering data from the Zillow website. This is something I do regularly. Zillow, by no means, is not my only source of data from the housing market, but it is the quickest available each month. Long-time readers of our blog know that we obtain housing data from numerous sources around the internet to provide a broad, unbiased view of housing market conditions, so if you are new here and think that I'm giving credence to Zillow or its business model, you can be assured that it's "just their turn" in our reporting cycle.
Today's Zillow Housing Market Update will show you that the mainstream media has inaccurately reported on home prices and conditions are not what they seem.<br /><br />
Demand Has Fallen For US Homes
This graph makes it clear that demand in the for-sale market is declining. It reports Zillow's estimated number of unique properties sold each month.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-unit-home-sales-graph-october-2022.jpg" width="880" height="641" alt="Zillow's count of all US home sales October 2022" title="Zillow Unit Home Sales Graph October 2022" class="img_box_center" />
The blue bars plot the number of homes sold, while the yellow bars plot the year-over-year change in sales. When the yellow bars rise about the horizontal axis, unit sales have grown. When the yellow bars fall below the horizontal axis, unit sales have declined.
Sales through September show that for thirteen straight months, home sales have declined in the US. This is non-seasonal information, as each month's change compares to the same month in the year prior. For example, the number of homes sold in September 2022 was 27% fewer than the number of homes sold in September 2021.
I don't think anybody would be surprised to discover why home sales are declining.<br /><br />
Mortgage Interest Rates Have Exploded Higher
This graph plots the average 30-year fixed mortgage interest rate since 1971, and the most recent months might shed some light on the decline in home sales.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-interest-rates-history-october-2022.jpg" width="880" height="641" alt="Average monthly mortgage interest rates October 2022" title="Recent Mortgage Interest Rates Graph October 2022" class="img_box_center" />
When I was preparing this graph in mid-October, I checked the Mortgage News Daily website, and it reported that the current rate was 7.16%, while the one-year-ago rate was 3.16%. Never before have mortgage rates moved so high, so fast. We've seen a 127% increase in mortgage interest rates in just one year! What’s truly crazy is that despite the large leap in interest rates, today’s rate remains below the fifty-year average.
Rising mortgage interest rates have cooled buyer demand, and viewers who remember the housing collapse in 2006 might be concerned that the supply of homes for sale is rising out of control. That happened in 2006, as builders were in full production mode while buyers were expelled from the market when the government changed lending requirements. Declining demand and rising supply created the bubble that sent home prices plummeting.
The next few graphs will help us understand the similarities and differences between today's housing market versus what we experienced in 2006.<br /><br />Small Growth In The Inventory Of Homes For Sale
In this graph, Zillow reports the number of unique listings active in each given month since the beginning of 2019.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-homes-for-sale-inventory-october-2022.jpg" width="880" height="641" alt="Zillow's inventory of US homes for sale October 2022" title="Zillow Inventory Of Homes For Sale Graph October 2022" class="img_box_center" />
The blue field plots the number of listings, while the red line measures the year-over-year change in inventory. Look where the red line crosses the dashed-blue line two months ago, as that is when the market shifted from inventory reduction to inventory growth.
I have seen a lot of discussion about inventory growth, but the 1% rise in our listings is an insignificant amount, considering how low the current supply of homes remains. There were more than 4 million listings during the housing bubble years, yet today we're barely above 1 million homes.
One might expect the inventory to rise rapidly as sales have plummeted, but remember, when a buyer opts out of the market due to affordability, it often is a buyer who would also have a home to sell. Thus a buyer leaving the market results in a seller leaving the market in roughly 50% of the cases. The move-up and move-down buyers have slowed, so inventory growth is not as many would expect.<br /><br />Median List Price Continues Rising
This graph plots the median prices at which homes across the US were listed and sold. Note that both are rising.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-median-home-price-october-2022.jpg" width="880" height="641" alt="Zillow's measure of the median home list price October 2022" title="Zillow Median Home Price Graph October 2022" class="img_box_center" />
The blue field in the graph shows the median list price, while the red line shows Zillow's estimate of the median home sales price during the same period.
The blue field shows a seasonal pattern on the median list price, with prices starting low at the beginning of the year, moving higher during the summer, and then falling slightly towards the end of the year. Interestingly, we've not seen a decline yet in 2022. I'm seeing reports of "list prices dropping." Where were those reports in each of the last five years when asking prices declined in the latter part of each year?
This graph reveals two things. First, home prices generally rise, so it makes sense that end-of-year asking prices are higher than at the beginning of the year. Second, sellers who tried too high of an asking price earlier in the year end up dropping their prices to get sold before the end of the year. Remember, a homeowner can ask any price they like, but to get sold, they have to meet the market at the right price.
The red line shows that there is no actual inner-year cycle for prices, they just generally rise. The red line had been rising faster of late, but the declining number of sales has flattened to where prices are growing at more "normal" rates (the average home price growth over the past 80 years is 5.2% annually).<br /><br />US Home Price Growth Is Cooling
This graph is Zillow's estimate of the median home price, measuring the typical home price for single-family homes, condominiums, and co-ops in the United States. It reflects the typical price of homes in the 35th to 65th percentile. In other words, it approximates the median by swiping the middle third of the market and analyzing it over time.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-value-index-october-2022.jpg" width="880" height="641" alt="Zillow's Graph Of The Median Home Price October 2022" title="Zillow Median Home Value Index October 2022" class="img_box_center" />
If you look closely at this graph, you'll see that Zillow has reported home values from 2000 through September of next year because their dataset includes past data plus a forecast that home values will rise 1.4% over the next twelve months. Just as a reference to how conservative Zillow's estimate has become, it estimated 17.3% annual growth back in January (nine months prior).
Zillow’s Home Value Index provides a great perspective on the toxic decline in home affordability. When we compare the slope of home price growth over the past two years to the slope of price growth during the housing bubble, it is an alarming image.
One must remember, however, that the supply and demand dynamic for homes is the key driver for the change in home prices. Today's abysmally low supply of homes has caused home prices to soar, and as we will see in our next graph, home prices are growing in 99.7% of the markets in Zillow's report.<br /><br />Rental Rates Continue To Move Higher
The final graph in today's Zillow Housing Report explains while there is no housing bubble, the housing market is in worse shape than it was during the housing bubble years. It measures what Zillow refers to as the "typical observed market rental rate" and, like its Home Value Index, takes a swipe from the middle of market rents to approximate the median rental rate over time.
<img src="https://assets.site-static.com/userfiles/663/image/rental-rate-growth-us-October-2022.png" width="880" height="641" alt="Zillow's measurement of the change in rental rates October 2022" title="Zillow Observed Rent Index Graph October 2022" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
The blue area measures the rental rate index each month (median rent), while the red line plots the year-over-year percentage change each month. It is this red line that is disturbing.
As the inventory of homes for sale has declined, so has the inventory of homes for rent. People who must move today have no good choice between buying versus renting a home. The cost for each has exploded higher.
In September, the median rental rate of $2,084 was nearly 11% higher than the median rental rate of $1,882 recorded in September 2021. Can you imagine if your monthly rent was increased from $1,900 to over $2,100 per month? If the rate remains the same over the next year, the median unit will rent for $2,300 per month, a rent hike of more than $400 monthly in just two years!
The only good news to report on rents is that the growth rate is slowing (albeit to a double-digit rate).
I often receive comments from viewers on our <a href="https://www.youtube.com/channel/UC91JHHJm-D8cFDeXR1RQIBA" title="Joe Manausa Real Estate On YouTube">YouTube Channel</a> saying they are waiting for home prices to fall. I certainly understand the feeling, but I have to wonder, where are they living while waiting?
Are they waiting in a rental property where their lease renewal will be 11% higher this year after rising about the same last year? Or are they waiting in a home they own? If they are right and home prices drop, won’t the home they own drop too? This means they’ll sell cheaper to buy cheaper! So what’s the point in waiting? That’s the trouble with trying to time the housing market, either way, you’ll pay more.
The fact that both rents and prices are moving higher together confirms that the supply of homes in the US is insufficient to house our growing population. Overall, when supply is insufficient to fulfill demand, prices rise. Until we see significant output from US home builders, we should continue to anticipate rising prices (and rising rents). There will be markets where the supply of homes outpaces demand, but overall, the US housing market remains undersupplied.<br /><br />Zillow Confirms Home Affordability Crisis
The previous graph is the smoking gun that lets us know just how toxic home affordability has become. When people get priced out of the "for sale" market, they can no longer turn to the "for rent" market, as they will be priced out of that too!
Most people do not realize that when home prices crashed after the housing bubble, rents kept moving higher. That was a sign that we did not interpret correctly, as it was a signal that despite the large inventory of homes for sale, there were not "too many" homes built in America.
The plummeting demand that caused the inventory imbalance was caused by government involvement that took away loan options for nearly all but the wealthiest of borrowers. Loan qualification standards were pushed far higher than ever in the past by a government intent on slowing a perceived "out of control" housing market.
Since the bubble burst, we have seen a significant slowdown in the number of residential units built to house our growing population. With the rise in <a href="https://www.youtube.com/watch?v=9jOtFZ8sNWg" title="Who To Blame For Soaring Home Prices">NIMBYism</a>, it has become very difficult to build and develop the shelter our population requires. Additionally, inflation has pushed the cost of new construction to a level where the median home buyer cannot be served.
The more that I read, and the more that I study housing data from various sources, the more I am convinced we are rapidly heading towards a renter nation. In an industry where there has never been centralized control of home prices and rental rates, I am concerned that we'll begin to see home prices and rental rates dictated by Wall Street giants as they consume much of the inventory in the future.
This should not be a surprise to anybody who has followed the growth of Amazon. It has eaten up and spit out local businesses as it expanded its reach across numerous industries. The "Mom And Pop" businesses have struggled to stay alive, many of which have closed down. Is there any industry more "Mom And Pop" than housing? I fear thirty years from now, we'll look back and see the same fate has hit housing as some new "Amazon" controls the housing market in all but the least-populated locales.
If you feel like I'm overreacting or you have ideas for a different outcome, I welcome your comments below.<br /><br />Year-Over-Year Home Price Change By Market
This graph reports all US markets where the year-over-year change in home prices grew by 25% or more!
<img src="https://assets.site-static.com/userfiles/663/image/year-over-year-home-price-changes-oct-2022.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth" title="Year-Over-Year Home Price Changes" class="img_box_center" />
Of the 894 cities reported by Zillow, 891 posted growth in home prices for the past twelve months. Only 3 markets reported declines:
Boise City, ID Down 1.6%
Fairbanks, AK Down 6.6%
Minot, ND Down 7.8%
Overall, Zillow reports the year-over-year home price in the US has risen 14.9% since September 2021, but I'm sure some of our readers will want to say, "that's not what I'm hearing elsewhere," so let's dig a little deeper into why we're seeing so many reports of falling home prices.<br /><br />Month-Over-Month Home Price Change By Market
This graph reports the US markets where the month-over-month change in home prices was the highest.
<img src="https://assets.site-static.com/userfiles/663/image/month-over-month-home-price-changes-oct-2022.jpg" width="880" height="641" alt="graph of top 50 markets for home price growth last month" title="Month-Over-Month Home Price Changes" class="img_box_center" />
Of the 893 cities reported by Zillow, 769 (86.1%) posted growth in home prices for the past month, while 124 markets (13.9%) reported declines. Perhaps this is why we're inundated with reports of declining home prices.
If you have seen some of my recent reports on US home prices, then you know that it is common for the median home price to stagger step higher throughout the year (or stagger step lower in a declining market). We really can't call price change trends after a few months because if we did, we would have reported declines in each of the past five years (years when the median home price soared). I've included a video below that shows home price changes with their staggered advances.<br /><br />US Home Sales By Month & Year
This next graph plots the number of monthly listings for the past four years. It's a different view of listings that sheds light on the volume reduction in inventory.
<img src="https://assets.site-static.com/userfiles/663/image/home-sales-by-month-year-oct-2022.jpg" width="880" height="641" alt="graph of US home sales by month and year" title="Number Home Sales By Month & Year" class="img_box_center" />
The black line in the graph above plots the number of listings that entered the market each month this year. Note that there are now (slightly) more listings than last year at this time, the number of homes for sale remains far lower than what was reported in the previous two years. It's important to remember that those years were inventory deficient as well.
Today, the number of listings is 30% to 60% lower than in recent years, and all four years shown were sellers' markets, where the number of listings was far too few for the demand in the market. Demand will have to go far lower to create the supply and demand dynamic that will cause home prices to fall for an extended period.<br /><br />New Listings Entering The Market
This graph plots the number of new listings entering the market each month for the past four years.
<img src="https://assets.site-static.com/userfiles/663/image/new-listings-us-october-2022.jpg" width="880" height="641" alt="Graph of new listings in the US for September 2022" title="New Listings Last Month" class="img_box_center" />
Even as many national news media report that home prices will crash and burn, we see the inventory drop. The only way we'll see major price declines is for supply to outrace demand, but this graph clearly shows that supply is dropping in line with demand.
As of today, it is safe to report that there is no sign of a growing-supply problem. Instead, the lack of supply will put further pressure on home prices. If you want to know more about new construction homes, I’ve included a video below that digs into builder production and the new construction pipeline.2022-10-17T03:00:00-07:002022-10-25T08:17:36-07:00Joe Manausatag:manausa.com,2012-09-20:31254Are Wages Keeping Up With The Housing Market?<img src="https://assets.site-static.com/userfiles/663/image/wage-inflation-home-affordability.jpg" width="880" height="587" alt="Home prices are higher. Mortgage interest rates are higher. But does that mean that home affordability is tanking?" title="Are Wages Keeping Up With The Housing Market?" class="img_box_center" />Home prices are higher. Mortgage interest rates are higher. But does that mean that home affordability is tanking?
To answer this question, I have produced an analysis that examines the cost of buying and owning a home today compared to the past 45 years. A recent reader recommended that I adjust current monthly mortgage payments with wage-inflation data to answer this question, which is what I have done.
Wages have risen, but have they risen as fast as home prices and mortgage interest rates? Follow along with me through this short post, you might be surprised with the answer.<br /><br />
Median Home Price Continues Higher
This graph plots the US median home price each quarter from January 1987 through June 2022.
<img src="https://assets.site-static.com/userfiles/663/image/us-median-home-price-september-2022.jpg" width="880" height="641" alt="Graph of the US median home price from 1987 through 2022" title="US Median Home Price Graph" class="img_box_center" />
The fact that home prices are rising is not newsworthy, but a picture of the growth they have encountered is enough to take your breath away. Through June, the median US home price was $440,300, a rise of more than 15% from a year ago when the median home price was $382,600.
As I have addressed in numerous other reports, the US has not been producing enough new homes to house its growing population. This is confirmed with both home prices and rents soaring due to the limited supply of homes.
Rising prices is one major factor in the decline of home affordability, and the next graph shows us the double-whammy second factor that is hurting home affordability too.<br /><br />Mortgage Interest Rates Are Double Last Year's Rate
This graph plots the 30-year fixed mortgage interest rate for the past 50+ years.
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-interest-rates-sep-2022.jpg" width="880" height="641" alt="Graph of the US mortgage interest rate history" title="US Mortgage Interest Rates Graph" class="img_box_center" />
A cursory examination of the graph shows that today's rate is still well below the 50-year average. Unfortunately, while rates are still relatively low, they are now more than double the one-year-ago rate. This has created sticker shock in the housing market, and home sales have tumbled.
Take a close look at the long-term trend. Generally speaking, we have enjoyed declining rates since the 1980s, and this has been a huge boon to home affordability. There are several generations of Americans who have purchased homes and refinanced them over the years to obtain cash for living expenses.
Additionally, we have seen generations of move-up buyers who were able to use the equity generated from their homes (combined with lower mortgage interest rates) to buy superior homes. With rates having hit all-time lows last year, it might be a long time before the move-up buyer market returns in force.<br /><br />Home Affordability Has Deteriorated
This graph shows how both rising prices and rising mortgage interest rates have impacted the monthly mortgage payment a median homeowner is making.
<img src="https://assets.site-static.com/userfiles/663/image/median-home-mortgage-payment-unadjusted.jpg" width="880" height="641" alt="Graph of the US median home mortgage payment from 1987 through 2022" title="US Median Home Mortgage Payment Graph" class="img_box_center" />
The median home price is plotted in blue and reported on the left vertical axis, while the monthly mortgage payment in green (principal and interest) is reported on the right vertical axis.
The median monthly mortgage payment has grown 233% since 1987, from $750 to over $2,500 per month. More importantly, much of that growth has occurred in just the past two years.<br /><br />US Wage Inflation Is Accelerating
This graph plots US wage inflation since 1987.
<img src="https://assets.site-static.com/userfiles/663/image/us-wage-inflation-september-2022.jpg" width="880" height="641" alt="Graph of the US wage inflation from 1987 through 2022" title="US Wage Inflation Graph" class="img_box_center" />
The graph above plots the consumer price index for all urban wage earners and clerical workers.
It is one thing to say that mortgage payments have grown, but inflation has caused the price of everything to grow. Note how sharply wages have turned higher in the past two years.
We can use the information in the graph above to compare how mortgage payments have moved relative to wages. We know people are earning more and spending more, but which is prevailing for their housing budgets? Our next graph reveals the effective growth rate of mortgage payments since 1987.<br /><br />Wage-Adjusted Monthly Mortgage Payments Nearing High
This graph, similar to the previous graph, plots the median home price and the median monthly mortgage payment and adds the wage inflation-adjusted median monthly mortgage payment.
<img src="https://assets.site-static.com/userfiles/663/image/wage-inflation-adjusted-home-affordability.jpg" width="880" height="641" alt="Graph of the US home affordability from 1987 through 2022" title="US Home Affordability Graph" class="img_box_center" />
When adjusted with the consumer price index for all wage earners, the monthly mortgage payment (red line) is far less extreme than the unadjusted payments. Our next graph zooms in on this payment.
<br /><br />Wage-Adjusted Monthly Mortgage Payments
The final graph in our report shows how the wage-adjusted monthly mortgage payment has changed since 1987.
<img src="https://assets.site-static.com/userfiles/663/image/wage-adjusted-monthly-mortgage-payments.jpg" width="880" height="641" alt="Graph of wage-adjusted mortgage payments from 1987 through 2022" title="Wage-Adjusted Monthly Mortgage Payments Graph" class="img_box_center" />
When adjusted as we have done in the graph, the monthly mortgage payment is represented in 1987 dollars. Surprisingly, today's crazy-high mortgage payments have not yet established a new high. Payments from 1988 through 1990 were often higher than today's payments.
What I find most interesting is how low wage-adjusted mortgage payments dropped at the end of 2011. In November of 2011, the wage-adjusted mortgage payment was less than 1/2 of the high reached in 1988. This reminds us how good the housing market has been recently, so we should expect tougher times ahead.
Are Wages Keeping Up With The Housing Market?
Based on the data explored today, it is clear that wages HAVE kept up with the soaring prices of the housing market. Monthly mortgage payments today are consistent with payments 35 years ago and are only slightly higher than payments 15 years ago. One could argue that we’ve had it really good of late.
But will this trend continue?
I believe that it will, but things are going to get worse before they get better.
We should all brace for rising mortgage interest rates. The Fed has made it pretty clear that they are expecting to raise the Fed Funds rate several more times to curb inflation. This means that today's shocking home affordability levels are likely to be better than what buyers will face in 2023.
As far as wages go, it's a variable outside of my field of study. I can provide anecdotal evidence as a small business owner that I'm seeing wages much higher today than what we saw just two years ago. Starting salaries are far higher, pushing all salaries northward as well.
When you consider that many states have increased their minimum wage levels at rates far higher than the historical norm, I believe you should expect to see continued acceleration in wage growth. How the Fed reigns in inflation without trumping wage inflation is a question beyond my fields of study.
The effectiveness of the Fed's strategy over the next five years will have a great impact on home affordability in the years to come. Keep checking back with us from time to time, and we'll keep you in the know for housing.2022-09-12T02:51:00-07:002022-09-20T07:46:25-07:00Joe Manausatag:manausa.com,2012-09-20:30197Just How High Are Today's House Prices?<img src="https://assets.site-static.com/userfiles/663/image/inflation-adjusted-house-prices.jpg" width="880" height="587" alt="Inflation Adjusted House Prices July 2022" title="Inflation Adjusted House Prices" class="img_box_center" />The price of houses in the US has risen to a toxic level and many are wondering how they will be able to afford to live in their local communities just as we are wondering the same in Florida's Capital City.
With a limited supply of houses in both the for-sale market and the for-rent market, both rents and prices have recently moved to historically high levels.
One way to get a feel for how home prices today compare with those of the past is to grab home price history, adjust it with inflation to establish a level playing field, and then apply historic mortgage interest rates to show what buyers have been spending on their monthly mortgage obligations.
Today's report reveals how today's homebuyers are faring compared with those that purchased homes since 1987.<br /><br />
You have a good job. Your spouse has a good job. But somehow, you cannot afford to buy a home? What is happening to the American Dream? A quick study of home prices and then an adjustment for inflation will show you exactly what is going on.
House Prices Have Tripled Since 2000
The red line in the graph below plots the S&P/Case-Shiller US National Home Price Index where all years have been adjusted to a January 2000 level of 100.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-prices-july-2022.png" width="880" height="641" alt="Graph of historic US home prices July 2022" title="US Home Prices July 2022" class="img_box_center" />
The home value index in the US has tripled since January of 2000 which means that homes have appreciated more than 5.25% each year, on average, for the past 22 years.
While that seems like a respectable growth rate, it really has little meaning without comparing it to other things. Like how have wages grown during that time? What about automobiles, gasoline, utilities, food, etc?<br /><br />This next graph helps us understand the relative change in the home price index by adjusting it with inflation (the consumer price index).
Inflation-Adjusted Home Prices
This adjustment would reveal a flat line if homes only moved at the same rate as inflation, a declining line if home prices rose slower than inflation, and a rising line if homes rose at a rate faster than inflation.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-prices-inflation-adjusted-july-2022.png" width="880" height="641" alt="Graph of historic US home prices adjusted by inflation July 2022" title="US Home Prices Inflation Adjusted July 2022" class="img_box_center" />
The dark blue line is clearly rising over time, meaning that homes have beat inflation for the past 35 years, though there have been cycles along the way. For homeowners, this means that the money they put into their homes worked for them and they became wealthier.
But what does this mean for buyers today?<br /><br />A New 35-Year High For Monthly Housing Costs
The final graph in today's report shows just how toxic current market conditions have become for homebuyers.
<img src="https://assets.site-static.com/userfiles/663/image/us-mortgage-payments-inflation-adjusted-july-2022.png" width="880" height="641" alt="Graph of mortgage payments based upon historic US home prices July 2022" title="Inflation Adjusted Mortgage Payments Graph" class="img_box_center" />
The red and blue lines in the graph are the same as they were in the two previous graphs, while the gray field measures the change in mortgage payments (expressed in terms of monthly cost per $100K borrowed).
Mortgage payments are calculated by using inflation-adjusted home prices and historic mortgage interest rates, thus every payment is expressed in dollars valued at their January 2000 level.
The gray area shows cyclic behavior revealing that relative mortgage payments rise and fall over time, but today's payment level is higher than any in the past going back to 1987. Perhaps the most troublesome result of this analysis is that the change in inflation-adjusted mortgage payments is up more than 50% in just the past two years.
People who purchased and financed homes from 2011 through 2020 were generally spending less per month than anybody who purchased and financed homes in the 1990s. But people purchasing today are paying more than at any time going back to the early 1970s.<br /><br />So Where Do We Go From Here?
We are entering unprecedented times. We have a federal government that has proven it will manipulate financial markets to "fix" housing and combat inflation.
You have many people expecting home prices to fall, but they are expecting this out of fear, ignorance, or a recency bias that has them believing that is how all markets correct themselves. That is simply never been the case.
All markets correct themselves through an adjustment to the supply and demand dynamic. Traditionally in the housing market, when home prices were soaring, home builders would step in and provide more supply to satisfy demand. As real estate is an imperfect market, builders would overshoot demand, and then we'd see a market shift to one that was oversupplied and favored buyers.
But we have not seen builders step up production in this run. There are no homes in the pipeline that will cause the market to shift. In the US, we are several million homes short and of course, we annually need to produce more than one million new homes to meet current market demands from our growing population.
The "YouTube Real Estate Evangelists" are telling us that home prices will crash soon, because of one of the following:
There are too many homes being built
There's a wave of foreclosures coming
Institutional investors are going to release the homes they've been buying to flip
So let's go over each one of these to see the true impact on a housing price crash.
Home Builders Are Saddled With High Material Costs
Builders are in a catch-22 right now. The soaring costs of materials due to increases in wages and pipeline disruptions from COVID is making it tough for them to deliver homes to the market. This is why the market has not been flooded with new construction homes.
And contrary to reports you might have heard about new homes getting ready to flood the market, at what price do you think builders can deliver homes? They will never again be able to bring homes to the market at pre-COVID prices, and I suspect they won't even be close for the next few years.
Generally speaking, the greatest unfulfilled demand in the housing market is for median and lower-priced homes, and builders cannot deliver at these prices (until prices reach the builders' cost levels). We need more inventory but how do you create it at current price levels?
The Foreclosure Wave That Never Happened
The foreclosure crisis never arrived. Why? Because equity returned to the housing market. Distressed homeowners either worked out a deal with their lenders or they sold their homes, paid their bills, and pocketed some equity.
All the great talking heads online that promised foreclosures are now promising something new, and the fact is, NONE of them are talking about the supply and demand for homes. Yes, demand is falling due to rising mortgage interest rates, but with falling demand comes falling supply as more than half the homes in the market have sellers who need to buy.
Forget about foreclosures. The current mortgage pipeline is very healthy as it is stuffed with loans that went out at historically-low mortgage interest rates and homeowners will not want to lose sub-3 % money any time soon!
Institutional Investors - 2 Things You Should Know
There are concerns that the large institutional investors of single-family homes are going to be shedding inventory because they fear falling prices. Anybody who follows the real estate industry has heard that Zillow canceled its home buying program and announced it was liquidating all holdings.
So now I'm getting comments telling me it's not foreclosures that will flood the market, rather it's the institutional investors liquidating inventory that will soon envelop the market. WRONG!
These investors are buying homes with the purpose to rent them (not to flip). Currently, institutional investors only own about 0.2 percent of all single-family homes, and just one percent of rental homes, according to recent data presented to the U.S. Senate by <a href="https://news.theregistryps.com/as-institutional-investors-buy-up-single-family-homes-everyday-americans-must-sprint-to-catch-the-american-dream%EF%BF%BC/#:~:text=Currently%2C%20institutional%20investors%20only%20own,Senate%20by%20The%20Heritage%20Foundation." title="Americans Must Sprint to Catch the American Dream">The Heritage Foundation</a>. The Heritage Foundation also pointed out that in no state, do institutional investors own more than 1 in 100 of all available housing.
So here are my two points on Institutional Investors. #1, Institutional investors are buying homes for long-term holdings (because rents are soaring), and #2, they are barely in the game (yet). If all Institutional investors dumped their inventory tomorrow, it would greatly help the supply imbalance in the market and would slow down our toxic real estate inflation. Just don't hold your breath waiting for this to happen.
INSERT YOUR FAVORITE SHOCKING REAL ESTATE HEADLINE HERE
I've included this final paragraph for the next "big thing" that is going to bring down home prices without distorting the supply and demand dynamic in real estate. I promise there is a next sensational headline just waiting to grab our attention, but until somebody can explain how it will make our market OVERSUPPLIED WITH HOMES, I'm going to stick with my current worry about home affordability.
I will continue to believe that home prices will move higher, home affordability and homeownership rates will fall, and we'll see a "corporatization" of the US housing market. We'll see traditional homeowners become tenants who pay a larger % of their disposable income to their landlords than they would have paid to the bank. We'll probably see rent control and other governmental "solutions" kick in and I'm concerned that the overall quality of life for most Americans will fall.
My advice remains unchanged: Fix your housing situation for what you will need for at least the next ten years, as you won't like the result you get from waiting.2022-07-25T02:51:00-07:002022-07-26T07:14:36-07:00Joe Manausatag:manausa.com,2012-09-20:27648Here Is When Home Prices Will Fall<img src="https://assets.site-static.com/userfiles/663/image/when-will-home-prices-fall-2022.jpg" width="880" height="587" alt="Here Is When Home Prices Will Start Falling" title="When Will Home Prices Fall 2022" class="img_box_center" />There is a major question about the housing market among consumers who remember the last time the housing market rose high so quickly.
They remember 2004 through 2006 when home prices roared higher at double-digit appreciation rates. And they remember 2007 through 2012 and the wailing and gnashing of teeth as home values fell by more than 30%.
Now that we've seen about three years' worth of skyrocketing home prices, prudent buyers with memories are asking when home prices are going to start falling again. After all, it happened 14 years ago, so when will home prices turn this time?<br /><br />If you study history (specifically the history of home prices), then you know that home prices rarely drop. There are times when home prices fall, but there are some key indicators that we have to spot before real estate enters a depreciation stage.
Historic Home Prices Graph
This graph plots the average US home price since 1890, derived from the S&P/Case-Shiller home price indices.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-prices-graph-march-2022.jpg" width="880" height="641" alt="The history of home prices in the US from 1890 through 2021" title="Historic US Home Prices Graph" class="img_box_center" />
For the past 131 years, we have seen home prices (on average) move 3.38% higher annually. The red-dashed line plots the average annual growth, but there were times when home prices actually fell.
When we analyze the declining prices over the past 100 years, we find that prices fell on just four occasions, and two of them were small one-year shifts.
1. The Great Depression - The longest and deepest downturn in the history of the United States and the modern industrial economy lasted more than a decade, beginning in 1929 and ending during World War II in 1941 (from the <a href="https://www.federalreservehistory.org/essays/great-depression#:~:text=The%20Great%20Depression-,1929%E2%80%931941,World%20War%20II%20in%201941." title="The Great Depression">Federal Reserve History</a>).
2. The Great Recession - The 2007-09 economic crisis was deep and protracted enough to become known as "the Great Recession" and was followed by what was, by some measures, a long but unusually slow recovery (from the <a href="https://www.federalreservehistory.org/time-period/great-recession-and-its-aftermath" title="The Great Recession">Federal Reserve History</a>).
3. 1959 - The average home price fell by just one-tenth of one percent.
4. 1991 - The average home price fell by 1.3%
One could argue that it takes a rather large economic event for home prices to drop, so that is why it is always prudent to keep a close eye on the economy to forecast home price declines.
It's important to note that there have been twelve recognized economic recessions since the end of World II and only 1991 and the years 2007 through 2011 saw home prices decline. This means that a recession alone is not enough reason to expect falling home prices, rather home price declines require additional factors.<br /><br />Is Recency Bias Distorting Housing Market Forecasts?
Today's skyrocketing home prices should have you concerned as it qualifies as a major economic move that is large enough to trigger falling prices. But one also needs to consider that "recency bias" has most "real estate experts" too expectant of price declines.
According to <a href="https://en.wikipedia.org/wiki/Recency_bias" title="Recency Bias Defined">Wikipedia</a>, recency bias is a cognitive bias that favors recent events over historic ones. A memory bias, recency bias gives "greater importance to the most recent event", such as the final lawyer's closing argument a jury hears before being dismissed to deliberate. Recency bias can skew investors into not accurately evaluating economic cycles.
If you believe that home prices are going to fall, history suggests that you are right, but you're also wrong! You are right in that we should expect a time in the future that home prices will fall, but you're wrong to believe that it will happen without the traditional triggers that cause real estate depreciation.<br /><br />Pay Attention To Supply And Demand
Whenever I read a report (or watch a YouTube video) that warns of falling home prices, I'm always amazed that NONE of them ever reference the supply and demand dynamic for homes. These reports are prepared by people who want to create a shocking story to attract attention, but they are based upon a recency bias that has them believe that home prices always fall after rising. History has shown this simply is not the case.
<img src="https://assets.site-static.com/userfiles/663/image/us-supply-of-existing-homes-march-2022.jpg" width="880" height="641" alt="Graph shows the supply of homes for sale in the US over time" title="US Supply Of Existing Homes" />
The graph above shows the supply of homes for sale in the US over time. It also incorporates recent home sales activity to include demand. The blue bars measure the number of existing homes for sale in the US (measured on the left vertical axis) while the relative supply (months of supply) is shown in red and reported on the right vertical axis. The relative supply represents the current supply of homes relative to the current rate of demand.
The gray-dashed line reports the one-year trend of the relative supply of existing homes for sale, which right now is measuring at its lowest level on record at roughly two months of supply.
Historically, it has been six months of supply that has resulted in an annual appreciation rate of 3.38%, so we can see that today, the housing market is grossly under-supplied and that is why home prices are soaring (and more importantly, why prices will continue to soar until the supply imbalance is resolved.<br /><br />The Supply And Demand For Homes
Anybody who forecasts falling home prices in the foreseeable future is ignoring today's housing market conditions. Home prices must continue to rise. But history does tell us that home prices will fall at some point in the future, so what do we need to be monitoring to anticipate market changes?
To best answer this question, let's break it down into the two primary components of price change, Supply and Demand. Today, it's not enough to say that demand is far outpacing supply or that high demand for homes is causing home prices to soar. Why?
Because today's level of demand is not astronomically high, it is actually where we would expect it to be during a vibrant, growing economy. The real problem is on the supply side, US homebuilders have not produced the homes that our growing population needs.
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-starts-march-2022.jpg" width="880" height="641" alt="Graph of US housing starts since 1959" title="US Housing Starts Graph" class="img_box_center" />
The graph above plots housing starts in the US since 1959. The red line shows the ten-year average and it was, and still remains far lower than the historical norm for the past ten years. While some reports came out in 2021 claiming new construction was building at a frenzied pace, the reality is that the number of new homes started in 2021 was lower than starts recorded in twenty of the past sixty-two years.
Simply put, there have not been enough homes built for the past ten years to account for our growing population, and this is why both home prices and rental rates are soaring. The "for sale" market needs more homes, but so too does the "for rent" market. You can read this report for more information on the rapid rise of US home rental rates.<br /><br />Why Aren't Builders Producing More Homes?
I have been reporting on the under-production of new construction homes for many years, well before the COVID pandemic swept the world into significant supply channel disruptions.
Prior to COVID, one could argue that builders were still stinging from losses from the Great Recession and were overly cautious about over-supplying the market. When you combine that conservatism with the rising cost of land and the increased difficulty of developing lots for homes, builders were undersupplying the market with the homes that were needed.
Unfortunately, COVID struck in 2020 and added more fuel to the fire.
<img src="https://assets.site-static.com/userfiles/663/image/us-builder-material-costs-march-2022.jpg" width="880" height="641" alt="The cost of construction materials is soaring in 2022" title="Construction Material Costs March 2022" class="img_box_center" />
The graph above plots the index of construction material costs in blue (where 1982 = 100), and the annual cost percentage change in red. Note how the cost of materials has soared upwards of 30% in the past year alone!
The pre-COVID imbalance was something that could have been corrected fairly quickly, but the COVID (post-COVID?) supply channel disruptions make this a difficult problem to fix.
Currently, there is a shortage of homes in the US that already exceeds 5 million homes. The high material costs above mean that builders can either start building very expensive homes en masse today or wait until the supply chain issues are resolved to bring less expensive homes to the market. Either way, it will be many years before builders can reach equilibrium or possibly oversaturate the market with new homes.
Remember, the demand for homes today is not at an all-time high, the major problem for US housing is the inability to bring new homes to either the "for sale" or the "for rent" markets. Our population is growing and we need more homes to restore the housing markets to balance.<br /><br />When Will Home Prices Fall?
Now that we understand the current supply and demand dynamic in the housing market, we know what to monitor to forecast the next decline in home prices. Here's what we should expect (barring wars or plaques that could have a significant impact on population change and thus reduce the demand for homes).
We know that home prices will fall when supply exceeds demand. I believe a combination of activities on each side of the ledger will bring these conditions sometime in the far future.
Supply: Homebuilders must produce more housing units until we see the relative supply of homes normalize and then imbalance to the supply side. Current production levels remain SLOWER THAN CURRENT DEMAND, meaning the supply imbalance is GROWING, not receding.
Demand: Rising mortgage interest rates and rising home prices will reduce demand in the "for sale" market, but increase demand in the "for rent" market. This will NOT cause falling home prices, rather it will cause a change in focus in the production of new housing units. It will also increase investor activity in the acquisition of homes.
The most likely outcome that I can see in the next few years is homebuilding slowly recovering to a pace that will be controlled by the speed at which supply chain issues are resolved. This means that our market will be undersupplied for the foreseeable future.
The demand side of the market will see great change too. The intrusion of the large institutional investors who will buy great quantities of homes to rent to those that can no longer afford to buy them will be the greatest change. We'll see fewer players in the "for sale" market and a great expansion of the "for rent" market and a long-term trend towards a return to a renter nation.
Homeownership will be for the "haves," while tenancy will be for the "have nots." It will take a great war or a great recession to bring about the next protracted period of home value declines. The foreseeable future continues to show demand outpacing the ability of the supply side of the US housing market.
Yes, there are some local markets inside of the US that will face different scenarios, but it will be because of declining population levels that are tied to economic issues and home prices. So maybe your local market might be different, but the majority of the overall US housing market is certainly in this position.
So, when will home prices fall?
Think about the process, not the outcome! We know the process required to produce falling home prices. Focus less on the fear mongers, and more on the plentiful data that will forecast a change in the home price direction.
Home prices will fall when there are more homes for sale than the current rate of demand will consume. We will get to this point when the supply imbalances in both the “for sale” and the “for rent” markets have been fixed. People have to live somewhere.
My best advice is to get your housing plans set in stone today. If you think you might want to move within the next ten years, it will make better financial sense to make it happen today. You'll avail yourself of cheaper home prices and lower mortgage interest rates than what you'll likely find in the future.
If you are happy for the long-term in the home that you are in, you should explore refinancing to a new 30-year fixed-rate mortgage loan. Even if your current rate is slightly smaller, there might be a large chunk of equity that you can acquire to reduce your debt or grow your assets at a better rate.
We are facing a generational change in the housing market. Do your homework, consider your options, and make the best decision that you can today for you and your family.2022-03-21T02:51:00-07:002022-06-05T02:24:59-07:00Joe Manausatag:manausa.com,2012-09-20:27272Here We Go Again - Are We Overbuilding America?<img src="https://assets.site-static.com/userfiles/663/image/over-building-america-march-2022.jpg" width="880" height="587" alt="I've been asked recently for my opinion on the number of homes being built in the US" title="Are We Overbuilding America?" class="img_box_center" />I've been asked recently for my opinion on the number of homes being built in the US. Specifically, people are wondering if the ghost of 2006 has come back to bring more homes to the market than what can be consumed or simply put, they want to know "are we overbuilding America today?"
In order to answer this question, I have assembled data on the homes that have been built in the past as well as those that are being built today, and I'll show you what the data is telling us about new home construction activity in the US.
Some of our readers might be in local market situations that differ from the US overall, but for the most part, this report will reflect the activity found in the majority of US housing markets.
New Construction Listings In Tallahassee
The following list includes all new construction homes for sale in Tallahassee, and you'll see immediately that it holds far too few homes to alleviate our gross supply imbalance. In fact, Tallahassee's lack of inventory is consistent with what the majority of US housing markets have been reporting for the past two years.<br /><br />Are We Overbuilding America?
How Often Do Home Prices Fall?
I believe that the biggest fear that drives concern about overbuilding stems from memories of the Great Recession of 2008 when home values declined more than 30% before reaching market-bottom. Unfortunately, most people tend to go on recent memory rather than reviewing available data that includes far more history, so let's start our analysis with the question "how often do home prices fall?"
<img src="https://assets.site-static.com/userfiles/663/image/us-home-prices-2022.png" width="880" height="641" alt="Graph shows 150 years of US average home prices" title="How Often Do Home Prices Fall?" class="img_box_center" />
This graph plots the year-over-year change of the average home price in the US going back more than 130 years to 1890. The average home price is shown in blue while the annual change is plotted with vertical bars: green bars if home prices rose and red bars if home prices declined.
Over the past 100 years, we've seen home prices decline substantially three times, but only twice for long-duration declines. The declines occurred after the great depression, the onset of World War II, and then the recent Great Recession of 2008.
That means that we've only seen a decline once in the past 80 years, and it lasted five years from 2007 through 2011. I believe this recency bias has people looking for declines around every corner, rather than observing the supply and demand dynamic to help them formulate the most likely direction of home price movement.<br /><br />How Many New Homes Were Built?
If we want to better visualize the need for new homes, we can start by looking at a graph of the number of homes that have been built over the past 70+ years.
<img src="https://assets.site-static.com/userfiles/663/image/us-new-homes-completed-2022.png" width="880" height="641" alt="Graph shows 50 years of US average home construction" title="How Many New Homes Were Built Each Year?" class="img_box_center" />
This graph plots the number of new construction homes completed each month. The blue line shows the total number of units, and it is this line that we'll evaluate.
From 1970 through 2006, the average number of homes built was 129,434 each month (1.55M annually), but that fell to just 84,430 monthly (1.01M annually) over the past fifteen years. That's a difference of more than 8 million homes when compared to the recent norm.<br /><br />How Many New Homes Are Under Construction?
This next graph is built on the data that has people concerned that we might be overbuilding America.
<img src="https://assets.site-static.com/userfiles/663/image/us-new-homes-under-construction-2022.png" width="880" height="641" alt="Graph shows 50 years of US homes under construction" title="How Many New Homes Were Under Construction Each Year?" class="img_box_center" />
Much like the previous graph, this one breaks down homes by type, with the total shown in blue. The blue line has jumped significantly over the past two years, resulting in the highest number of homes under construction than we've seen since the 1970s.
Currently, there are roughly 1.6M homes under construction, which is 4x the number seen at the bottom of the housing market ten years ago. Without context, it's no wonder that many are concerned about over-building.<br /><br />How Many New Homes Were Authorized But Not Started?
There is another category of new construction homes that we must include in our count, and it is those homes that have been authorized (permitted in most areas) but have not yet started.
<img src="https://assets.site-static.com/userfiles/663/image/us-new-homes-authorized-not-started-2022.png" width="880" height="641" alt="Graph shows 50 years of US homes authorized but not started" title="How Many New Homes Were Authorized But Not Started Each Year?" class="img_box_center" />
This graph also reports a higher number than we have observed since the 1970s, with an absolute explosion of authorizations occurring within the past two years.
While not every home that gets permitted gets built, this information is still valuable in assessing the pipeline of new construction activity and the potential for new homes being built over the next few years.<br /><br />How Many New Homes Were In The Pipeline?
When we combine the data from the previous two graphs, it provides a good look at the number of homes in the pipeline.
<img src="https://assets.site-static.com/userfiles/663/image/us-new-home-production-2022.png" width="880" height="641" alt="Graph shows 50 years of US new homes pipeline" title="How Many New Homes Are In The Pipeline?" class="img_box_center" />
The graph above shows that there are fewer than 2M homes in the pipeline to help fill the need for new homes needed each year PLUS the 5.24 million homes that comprise the shortage that has caused prices to run out of control.
If all those homes were delivered at once, it would only make a healthy dent in the shortage. Unfortunately, those homes cannot all be delivered right away.<br /><br />The Rental Market Has A Shortage Too
Most people are going to believe that demand for homes will decline when mortgage interest rates push higher. While this is highly likely in the "for sale" market, it is absolutely not true in the "for rent" market.
<img src="https://assets.site-static.com/userFiles/663/image/zillow-observed-rent-index-feb-2022.jpg" alt="Graph shows 50 years of US new homes pipeline" title="How Many New Homes Are In The Pipeline?" class="img_box_center" width="880" height="641" />
This graph was produced from data provided by Zillow. It approximates the median market rental rate since 2015, and lately, rents have been soaring. Why?
Because the low inventory of homes for sale has consumed part of the rental inventory and now the shortage exists in both markets. If consumers get pushed out of purchasing, they will face a rental market that we have never before seen. Rents are soaring now, what will they look like when demand rises due to the fall of home affordability in the "for sale" market?<br /><br />The US Population Growth Is Slowing But Growing
When trying to determine the number of homes that need to be built each year, one could start by looking at the change in the US population.
<img src="https://assets.site-static.com/userfiles/663/image/us-population-graph-mar-2022.png" width="880" height="641" alt="Graph shows 50 years of US population change" title="US Population Graph" class="img_box_center" />
The graph above shows the US population in blue, and the ten-year growth rate in red. From 1960 through 2000, the ten-year growth averaged 11.2% but has since fallen to an average of 9.6% for the past 21 years. This decline would suggest fewer homes are needed than what we have seen previously.
But measuring population change alone does not fully explain what's going on in the world of people-moving. There are demographic changes that are occurring that can impact the need for homes too.
For example, the U.S. Census found that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time. It is this fact that caused realtor.com (in a published study last year) to report a housing shortage of 5.24 million homes.
Population growth and household formation growth has made it clear, more homes are needed.<br /><br />Putting It All Together
There is an ever-present fear of a housing market crash (defined by falling home prices) that is founded by the memory of the Great Recession of 2008. So many people lost their homes and/or their equity when home prices tumbled more than 30%, so the fear is very real.
The Great Recession crash occurred with no supply imbalance. In fact, it was the Fed's tightening of the money flow that crushed demand, pulling buyers out of the "for sale" market and displacing them to the "for rent" market. At the same time, we saw much of the inventory of homes for sale become inventory of homes for rent.
But as we've seen from the previous graph, today's rental market does not have the excess inventory for consumers to turn to when demand softens in today's housing market.
I do not believe we will see home prices dropping, but I am VERY concerned about the health of the housing market. Whether you are buying or renting, there are not enough residential units to satisfy our larger population. This means that both prices and rents should continue to rise until the imbalance is corrected.
I opened this article with the question: Are we overbuilding America? I believe the data shows that the answer is a resounding "NO." In fact, the opposite is true, we have underbuilt America and the result is rapidly appreciating home values and rental rates. We need our local community leaders to work together to solve the housing problem before things get any worse.<br /><br />How Long Does It Take To Build A Home?
This graph gives us an idea of when we should expect to see the new homes that are in the pipeline today.
<img src="https://assets.site-static.com/userFiles/663/image/how-long-does-it-take-to-build-a-home-2022.png" width="880" height="641" alt="This graph gives us an idea of when we should expect to see the new homes that are in the pipeline today." title="How Long Does It Take To Build A Home?" class="img_box_center" />
Even with construction delays, single-family homes are being delivered in about 8 months, while multi-family properties are taking closer to 1.5 years. When we use these numbers to calculate delivery dates, we can deduce the following.
Roughly one million single-family homes and another six hundred thousand multi-family homes should hit the market in 2022. That means we expect 1.6M homes will be added.
If the supply shortage is 5.24M homes and the "average" annual need for new homes sits at about 1.2M homes, we will see the shortage drop from 5.24 M homes to about 4.8M homes. In other words, even with optimistic expectations on the new construction industry to overcome supply chain issues and deliver homes, the US housing market will still have a huge shortfall of homes at the end of this year.2022-03-07T03:50:00-07:002022-03-08T08:53:38-07:00Joe Manausatag:manausa.com,2012-09-20:25861Here's What Zillow's Reporting About The Housing Market<img src="https://assets.site-static.com/userfiles/663/image/zillow-housing-market-report-feb-2022.jpg" width="880" height="587" alt="Report on the US housing market is done from Zillow data alone" title="Zillow Housing Market Report February 2022" class="img_box_center" />In case you didn't know, Zillow is a website that has <a href="https://www.manausa.com/idx/results/?searchtype=3" title="Homes for sale in Tallahassee Florida">homes for sale</a> and homes for rent for most markets in the US. While one could argue about their methodology for selling your contact information to real estate companies, nobody can deny the breadth of the data that Zillow collects.
One of the hardest things about reporting on the US housing market is finding reputable data sources that can give us what we need to properly evaluate current conditions, but I'm becoming a believer in the data that Zillow shares on the backend of its website.
This report on the US housing market is primarily supported by data supplied by Zillow, and it provides enough information for us to draw a logical forecast of what to expect in the months and years to come.<br /><br />Zillow Housing Market Update
US Home Sales Are Declining
The first graph in today's Zillow housing report shows a graph of the estimated number of unique properties sold each month.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-sales-count-february-2022.jpg" width="880" height="641" alt="Zillow's count of all US home sales February 2022" title="Zillow Unit Home Sales Graph" class="img_box_center" />
The blue bars measure the number of homes sold, while the yellow bars report the year-over-year change in sales. When the yellow bars rise about the horizontal axis, unit sales have grown. When the yellow bars fall below the horizontal axis, unit sales have declined.
January sales numbers show that for seven straight months, home sales have declined in the US. This is non-seasonal information, as each month's change is a comparison of the same month in two consecutive years. For example, the number of homes sold in January 2022 was 23% lower than the number of homes sold in January 2021.
The big question this graph raises is why are home sales declining?<br /><br />Inventory Of Homes For Sale Is Declining
In this graph, Zillow is showing the unique listings that were active at any time in a given month since the beginning of 2019.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-for-sale-inventory-february-2022.jpg" width="880" height="641" alt="Zillow's inventory of US homes for sale February 2022" title="Zillow Inventory Of Homes For Sale Graph" class="img_box_center" />
The blue field measures the number of listings, while the red line plots the year-over-year change in inventory. Look to where the red line crosses the dashed-blue line in 2019, as that is when the market shifted from inventory growth to inventory reduction.
In 2019, the market was already slightly skewed to sellers, as inventory levels were below six months of supply. As time moved forward, the low level of supply got continually worse and bidding wars among buyers became the norm.
The peak of the market inventories were 600,000+ homes too few, and homebuilder production has not yet stepped up to fill in the void, though there are signs that this might finally reverse in 2022.
I believe the historically low number of homes for sale has been a significant piece of the declining sales dilemma, as buyers have been trying to obtain loans before low mortgage interest rates go away forever. When you combine rising rates and declining inventories, it is no wonder that the number of home sales is falling.<br /><br />Median Home List Price Is Rising
This next graph plots the median price at which homes across the US were listed.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-median-list-price-february-2022.jpg" width="880" height="641" alt="Zillow's measure of the median home list price February 2022" title="Zillow Median List Price Graph" class="img_box_center" />
The blue field in the graph shows the median list price, while the red line shows Zillow's estimate of the median home sales price during the same time period.
The blue field shows there is a seasonal pattern on the median list price, with prices starting low at the beginning of the year, moving higher during the summer, and then falling slightly towards the end of the year. The median sales price does not move in a similar manner.
I believe this is showing us two things. First, home prices generally rise, so it makes sense that end-of-year asking prices are higher than the beginning of the year asking prices. Second, it shows that sellers who tried too high of an asking price earlier in the year, end up dropping their prices to get sold before the end of the year. Remember, a homeowner can ask any price that they like, but to get sold, they have to meet the market at the right price.
The red line shows that there is no actual inner-year cycle for prices, they just generally rise. The red line has been rising faster of late, and I believe we will not see any relief from the slope of sales prices until we start fixing the inventory shortage that has been wreaking havoc on the housing market since 2019.<br /><br />US Home Prices Are Soaring
This graph is Zillow's take on the median home price. Zillow explains the results as a smoothed, seasonally adjusted measure of the typical home value for single-family homes, condominiums, and co-ops including market changes across the United States. It reflects the typical value of homes in the 35th to 65th percentile range. In other words, it approximates the median by swiping the middle-third of the market and analyzing it over time.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-home-value-index-february-2022.jpg" width="880" height="641" alt="Zillow's Graph Of The Median Home Price February 2022" title="Zillow Median Home Price Graph" class="img_box_center" />
If you look closely at this graph, you'll see that Zillow has actually given us home values from 2000 through January of next year because their dataset includes past data plus a forecast that home values will rise 17.3% over the next twelve months
Zillow’s Home Value Index creates an inciteful image of how bad our housing market is behaving. Look at the slope of home value growth since 2020, it's toxically unhealthy. If you want some insight into what this price movement will do to the housing market, I urge you to watch some of my <a href="https://www.youtube.com/watch?v=SwXQiYkXH8M&list=PL3JrtRt_Vew1uCjHWXYZPqIoXsqXqMIpl&index=10" title="Home Affordability Forecast">videos on home affordability</a>. I suspect it's time to prepare for a move to a renter nation.<br /><br />US Home Rental Rates Are Soaring
The final graph in today's Zillow Housing Report shows why we're not going to be able to fix this housing market in the same way the last one was fixed. This graph measures what Zillow refers to as the "typical observed market rental rate" and like the previous graph, takes a swipe from the middle of the market to approximate the median.
<img src="https://assets.site-static.com/userfiles/663/image/zillow-observed-rent-index-feb-2022.jpg" width="880" height="641" alt="Zillow's measurement of the change in rental rates February 2022" title="Zillow Observed Rent Index Graph" class="img_box_center" style="font-size: 16px; font-family: 'Helvetica Neue', Helvetica, Arial, sans-serif; font-weight: 400;" />
The blue area measures the rental rate index each month (median rent) while the red line plots the year-over-year percentage change each month. It is this red line that should make your head spin.
As the inventory of homes for sale has declined, so too has the inventory of homes for rent. How do we know this? Well, in January, the median rental rate of $1,904 was nearly 15% higher than the median rental rate of $1,657 recorded in January of 2021. Can you imagine if your monthly rent was increased from $1,650 to $1,900 per month? If the rate remains the same over the next year, that same median unit will rent for $2,190 per month, a rent hike of more than $500 monthly in just two years!
What You Can Takeaway From The Zillow Housing Update
The previous graph is the smoking gun that lets us know just how troubled the housing market has become. When people get priced out of the "for sale" market, they no longer can turn to the "for rent" market, as they will be priced out of that too!
We have not been creating enough residential units to house our growing population, and unfortunately, inflation has pushed the cost of new construction to a level where the median home buyer cannot be served.
I am having a hard time finding a solution to what could be a severe turn towards a renter nation, where control of prices and rental rates move from "Main Street to Wall Street." If you feel like I'm overreacting or you have ideas for a solution, I welcome your comments below.<br /><br />Mortgage Interest Rates Are Rising
This graph plots the average 30-year fixed mortgage interest rate since 2016, and the most recent months might shed some light on the decline of home sales.
<img src="https://assets.site-static.com/userfiles/663/image/recent-mortgage-interest_rates.jpg" width="880" height="641" alt="Average monthly mortgage interest rates February 2022" title="Recent Mortgage Interest Rates Graph" class="img_box_center" />
When I was preparing this graph on February 15, I checked the Mortgage News Daily website and it was reporting that the current rate was 4.1% while the one-year-ago rate was 2.86%, meaning that the cost of money for homebuyers has pushed up 43% in just one year.
Obviously, rising mortgage interest rates have cooled buyer demand, but I believe there is another factor that has caused the number of homes sold each month to decline for the past seven months.2022-02-28T03:52:00-07:002022-08-23T09:20:24-07:00Joe Manausatag:manausa.com,2012-09-20:250132022 Housing Market Forecast: Are We Moving To A Renter Nation?<img src="https://assets.site-static.com/userfiles/663/image/us-housing-market-forecast-report-2022.jpg" width="880" height="587" alt="a comprehensive review of where the market is now, the market forces that are controlling the changes that we will see, and the likeliest path the market will take in 2022 and the years to come" title="2022 Housing Market Forecast" class="img_box_center" />Goodbye homeownership, hello landlord.
After 70 years of propping up the homeownership rate with interest rate manipulation, the US is in a position to begin the reversion to a renter nation. That's right, fewer buyers and sellers and more landlords and tenants. I believe it is unavoidable and will not be stopped.
This is a comprehensive review of where the market is now, the market forces that are controlling the changes that we will see, and the likeliest path the market will take in 2022 and the years to come.
I hope you enjoy my forecast for the US housing market in 2022 and beyond, you will find that it's loaded with charts and graphs of the most important factors in the real estate market today. If you stick with me to the end, you will have a clear understanding of how the housing market will unfold in the months and years ahead.<br /><br />US Housing Market Forecast 2022
Where We Are Now - It's All About Supply
Let's start by determining the present state of the US housing market. A simple look at the supply side will tell us a lot.
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-market-supply-january-2022.jpg" width="880" height="641" alt="Graph shows the real and relative supply of homes for sale in mid-December 2021" title="Supply Of Homes For Sale Going Into 2022" class="img_box_center" />
This graph plots the current supply of homes for sale in blue (measured on the left vertical axis) and then computes the relative supply of homes for sale in red (shown as months of supply on the right vertical axis). The white-dashed line shows the average relative supply of homes over time.
So what does this all mean? It means that the US housing market is severely undersupplied right now. The white-dashed line is approaching two months of supply, which means that on average, over the past twelve months, there have been just two months of supply of homes for sale in the United States!
Historically, most real estate professionals have felt that 6.0 months of supply is "normal," as at that level we have seen appreciation remain fairly stable around 3.5%. I have always felt the same, though I do believe the "new normal" will be lower than 6.0 months of supply now that the industry markets homes online. The ability to reach the majority of the market for a home no longer requires several months, so we could actually see the market equilibrium rate drop closer to four months of supply.
So if we use want to calculate the number of homes needed in the market right now, we merely take the average number of existing home listings over the past year (1,178,333) and multiple by 3 (if we believe 6 months of supply is equilibrium) or by 2 (if we believe that 4 months of supply is equilibrium). These calculations show that we are short by 1.2 to 2.3 million homes today.
Mortgage Interest Rates - #FOMO Heightens Demand
When we look to the other side of the supply and demand equation, we see strong demand. The number of home sales this year will not set an all-time high, though I believe it would have occurred had their been more available inventory.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-sales-totals-2021.jpg" width="880" height="641" alt="Graph depicts more than 30 years of home sales in the United States" title="US Home Sales 1989 Through 2021" class="img_box_center" />
This graph plots new home sales in red and existing home sales in blue, with 2021 estimates coming from statista.com and the national association of Realtors.
We can see that home sales have been robust, but perhaps not as frenzied as many would have thought reading all the headlines about an out-of-control housing market. If the year finishes as expected, 2021 will record the fifth-highest number of homes sold in the past 32 years.
The Supply & Demand Dynamic Is Unbalanced (BROKEN)
The result of low supply and strong demand is soaring home prices and soaring rents too. We simply do not have enough shelter for our growing population, and I am gravely concerned that home affordability is tanking for tomorrow's renters and buyers.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-home-price-and-rent-inflation-2021.jpg" width="880" height="641" alt="Graph shows the rate at which home prices and rents are rising in the US 2022" title="US Housing Price And Rent Inflation 2022" class="img_box_center" />
Anybody who has endured a basic economics class can tell you that when supply is low and demand is high, prices rise. The graph above shows that home prices are up nearly 14% in 2021 and rents have risen more than 8%. While we will cover prices and rents in greater detail below, you should know that the recent months' year-over-year gains in rents are now in the double-digits!
This graph shows out-of-control housing inflation that is going to price many people out of the market. This is not merely buyers, it is renters too. I believe the situation in housing is flying under the radar for most people, so there is going to be a shockwave when people realize they can neither afford to buy nor rent a place where they want to live!
So this is where the market is today. Soaring home prices. Soaring rental rates. Limited supply in both the "for sale" market as well as the "for rent" market. In our next section, we'll examine the market forces that have driven us to this condition.<br /><br />Variables Controlling Change
You probably have heard the phrase that "real estate is local," and that is so true. The value of a home is directly related to the supply and demand for similar homes nearby. But that does not mean that global market forces don't have an impact on local markets.
Let's explore some of these market forces that will determine the outcome for the housing market in 2022. Just like everybody else, I do not have a crystal ball, so I want to share the variables that I have considered when formulating my US housing market forecast for 2022.
Demand-Side Variables
Starting with the demand-side of the market, let's first look at a major component of demand. People!
To forecast the future need for homes, we need to know many people are in the US today versus how many were here in the past. As you might expect, a growing population puts demand-side pressure on the market, while a receding population does the opposite.
<img src="https://assets.site-static.com/userfiles/663/image/us-population-graph-2022.jpg" width="880" height="641" alt="Graph shows the us population growth from 1960 to 2022" title="Graph Of US Population Over Time" class="img_box_center" />
The US population is growing! Today, there are greater than 35 million more people living in the US than there were when the housing bubble burst 15 years ago. This means we need more shelter to house them and we should expect more people (on average) to move every year.
The fact that today's housing market is not as robust as it was at times 15 to 20 years ago suggests that there is plenty of upside for the housing market if affordable solutions can be found.
The Post-COVID Economy
Will we ever truly be "post-COVID?" I have no idea, but I'm still going to use this label as we have seen a significant economic rebound since early 2020.
The health of the economy is a major variable for housing. If the economy tanks, so too will home sales. But if the economy improves, it is likely housing will as well.
<img src="/userFiles/663/image/us-labor-participation-rate.jpg" width="880" height="641" alt="Graph shows the percentage of the labor pool participating over time" title="Labor Participation Rate By Age Group" class="img_box_center" />
This graph plots the participation rate for four key age groups in the US labor market. The "participation rate" is the percentage of people who participate in the labor force (meaning they either have a job or are looking for a job).
Look at the labor force's reaction to the pandemic in the first half of 2020. All four age ranges saw an immediate and sharp decline in the percentage of participants in the workforce. Since that time, the vaccination period responses have had differing reactions.
The 55 & Older age range (the purple line in the graph) has seen a continued decline, causing some to speculate that its group is led by a wave of early retirees. On the other hand, the 25 to 54-year-old group (the green line in the graph) is just slightly below its pre-pandemic level, and this is the group that most influences the housing market.
People aged from 25 to 54 represent the largest housing-market active segment of our population, and the fact that this age group had only a slightly negative response to the pandemic in the labor market is one of the primary reasons the housing market is still going strong.
Inflation And The Fed Funds Rate
We know there is inflation in real estate right now. Any prospective buyer or tenant will tell you it is crazy out there. But how about the rest of the economy? Have you been keeping up with the change in the inflation rate and how the Fed is responding?
Our Federal Reserve Board controls monetary policy and serves to keep stability in the economy. As an oversimplification, it uses interest rates as a device to speed up or slow down the economy, based upon what they are seeing with inflation.
The following graph shows two separate measurements. On the left side, we measure inflation in the blue shaded area. On the right side, we record the Fed's response (the effective Federal Funds Rate). Historically, when the blue starts going up, the red will rise. When the blue starts to decline, the red will fall. But is that what we are seeing now?
<img src="https://assets.site-static.com/userfiles/663/image/us-inflation-versus-fed-funds-rate.jpg" width="880" height="641" alt="Graph plotting inflation and the fed funds rate" title="Inflation Versus The Federal Funds Rate" class="img_box_center" />
Inflation, the blue area, is rising towards 7% year-over-year growth, yet the Fed Funds Rate hasn't budged. Just look how much higher the blue area (inflation) is right now versus any time in the past ten years. Inflation is running higher.
I have said this before, but it is worth repeating. The Fed is trapped right now. It has competing interests. It needs to raise the Fed Funds Rate to cool the inflating economy. But at the same time, it knows if it raises rates rapidly, it could shock the economy and slow or kill the recovery for the remaining sectors. Soaring rates would put a freeze on buying in the housing market. So the Fed holds while claiming that this spike in inflation is just temporary. I'm not buying it.
Mortgage Interest Rates - #FOMO Heightens Demand
The surge in home sales over the past two years has been heavily fueled by low-interest rates in the mortgage market. Rates hit an all-time low about a year ago, and now we have buyers with a fear of missing out on the lowest mortgage interest rates they will see for the rest of their lives.
To piggyback on the previous graph, let me share with you an ominous graph that should send shivers to your soul (OK, a bit overdramatic, but not by much!).
<img src="https://assets.site-static.com/userfiles/663/image/mortgage-rates-versus-fed-funds-rate-2022.jpg" width="880" height="641" alt="Graph shows both mortgage interest rates and the fed funds rate over time" title="Mortgage Rates Graphed Against The Fed Funds Rate" class="img_box_center" />
Don't let this graph overwhelm you, it appears to be really busy, but it is just a comparison of two different trends. The key is to focus on the dotted lines, and specifically, the highlighted dotted line.
The red dotted line shows the one-year average of the Fed Funds rate, while the blue dotted line shows a one-year average of mortgage interest rates. Finally, the black dotted line (highlighted in yellow) tracks the difference between these two trends, and the highlighted trendline is the one we really want to know.
The mortgage market (generally) follows the Fed Funds Rate, and we typically see the 30-year fixed mortgage rate hover between 3% to 4% higher than the Fed Funds Rate. Today the Fed Funds Rate is between 0.00 and 0.25, while today's 30-year fixed mortgage rate is 3.16%. So here is why this graph should shake you to your core.
In an opinion published this past summer, one Fed committee member said using the traditional model for determining the proper Federal Funds Rate, today’s rate should be close to 5%. If the Fed acted on that, a federal funds rate of 5% would suggest mortgage interest rates moving above 8% over the next year. While I do not expect that to happen real soon, we do need to know that the Fed cannot (and will not) sit on their hands forever. I am expecting a rise in the Federal Funds Rate early next year and that means we should anticipate a rise in the mortgage interest rates to follow.
Demand-Side Variables Expose Opposing Forces
As we take in the totality of the variables controlling demand in the housing market, there is strong evidence supporting both a growth and a decline in the demand for homes next year.
On the one hand, scarcity is still very strong and there is a growing list of people who have tried and failed to obtain housing this year. The population is growing, the economy is recovering, and the strongest segment of the economy includes the age group of people who buy and lease homes.
On the other hand, we have mortgage interest rates. The Fed has used a low Fed Funds Rate to fuel economic recovery from the pandemic, but the writing is on the walls. The Fed cannot allow runaway inflation, and that is what we are starting to see. The Fed will raise rates, and mortgage interest rates will follow. And that will bring the market to a "double-whammy" against home affordability.
When prices are rising and mortgage interest rates are rising at the same time, it makes homes far less affordable at a very rapid rate. Buyers have to pay more for the home and then simultaneously pay more for the money to purchase the home. Here's how prices and interest rates rising concurrently stifles the demand for homes:
Buyers typically take around 9 months to buy a home, from the time it becomes a conscious thought to make a move, until the day they close. So a brand-new buyer today would find homes that fit their budget and begin shopping.
Nine months from now when they are preparing to close, the homes (on average today) will cost 10% more and interest rates will likely be up by at least 1/2%. For somebody looking at a $300,000 home today, the monthly payment when they close nine months will have risen 17%! This will force buyers to lower their expectations or prepare to pay more money, and in my experience, neither one of those has a positive impact on demand.
Now I think the market can handle a 17% negative swing in home affordability, but what happens to that monthly payment if the Fed is forced to really combat inflation? What if the Fed Funds Rate explodes higher and suddenly we are dealing with mortgage interest rates in the 4%, 5%, or even as high as the 8% range? That would be a level of sticker shock I would not want to see.
Supply-Side Variables
At the beginning of this report, we examined the current historically low supply of homes for sale and the parallel low supply of homes for rent. Our growing population needs shelter, and the lack of supply of shelter has caused toxic inflation on both sides of the housing market.
I do not believe the traditional press has really picked up on this, but housing could easily move to the top of their commentary when we start to see the homeless rate rise. In fact, according to <a href="https://www.statista.com/statistics/555795/estimated-number-of-homeless-people-in-the-us/" title="Estimated number of homeless people in the United States from 2007 to 2020">Statista</a>, homelessness has been rising for the past two years. What do you think will happen (soon) with both rents and prices each exploding higher?
The supply of homes for sale comes from people moving or dying and from the new construction of homes. Without getting dark in this report, COVID could have had a positive impact on the supply of homes had the mortality rate been much higher. Fortunately, it did not. With a growing population, we need to see growth in the construction of new shelters, both multifamily as well as single-family too. But that is just not happening.
With a growing population, we need to see growth in the construction of new shelters, both multifamily as well as single-family too. But that is just not happening.
Housing Starts & Home Builder Issues
This graph tracks new housing starts over the past 63 years and it illuminates the categorically low rate of new home creation we are seeing today.
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-starts-through-nov-2021.jpg" width="880" height="641" alt="Graph shows the a historical track of housing starts over the past 60 years" title="US Housing Starts Through 2021" class="img_box_center" />
The blue area measures the housing starts, the new residential construction projects that began during each month. The red shows the linear trend of new housing starts, and it is declining.
The table below the graph shows twenty years from the past 63 years that all had more housing starts than 2021 and then shows how today's population has grown compared to that year. For example, at the far left of the table, there were more housing starts in 1963 than there were in 2021, yet our population is 76% larger today than it was in 1963. Think about that for a moment. Does our current rate of homebuilding make sense at all? It’s no wonder that existing home prices have moved so high.
The new-home-construction trend shows a decline over the past 63years, even as our country has grown significantly. That didn’t make sense to me so I played around with the trend line and found that the linear trend on this graph was actually rising at a rate parallel to population growth from 1959 through 2008. It has been the slow rate of new construction over the past 13 years that has caused the supply problem in the housing market!
********** IMPORTANT POINT HERE **********
In 2006, the "for sale" market was stalled when many loan programs were taken away and others were "tightened up" in an attempt to lower the default rate. With the flow of money stopped, buying was cut in half and new construction projects around the country drove up the supply of homes.
At that time, we all thought the market was "over-built." We were wrong. Now, if you were a home builder or a Realtor trying to earn a living selling homes, you saw the inventory everywhere, so this was a valid (but ignorant) conclusion. To better understand the totality of what was occurring, we should have taken a look at the impact on rents..
Even as investors swooped in and purchased cheap homes, the "for rent" market did fine and rents were stable. What we saw was the decline in the "for sale" market, what we failed to acknowledge was the rise in the "for rent" market. When the government changed the rules on borrowing, we saw demand shift from the "for sale" market to the "for rent" market.
Over the years, housing starts fell to anemic levels and the inventory slowly shifted from the "for sale" market to the "for rent" market. Equilibrium was reached in the "for sale" market by 2016 and lending standards softened. Since that time, we have seen both rents and prices move higher, yet new construction has not resumed its normal rate. In fact, the lack of construction has created a void in the supply chain for housing, so we're seeing both rents and prices soar.
The lack of new home construction is the reason the graph above shows a negative trend line for new homes instead of the generally rising line we would have observed had we only run the trend to 2008. America needs homes built to keep up with the growing population, and it has to step up the pace in a dramatic fashion. We are many millions of homes behind due to the post-housing bubble response of the market.
A Quick Shout Out To Kevin Erdmann
If you want a radically different understanding of the housing bubble, I strongly recommend that you follow Kevin Erdmann @KAErdmann on Twitter and read his book (<a href="https://t.co/wbTatNAvBo" title="Kevin Erdmann's Book">SHUT OUT: How a Housing Shortage Caused the Great Recession and Crippled Our Economy</a>).
The red line is the number of housing starts required to meet population growth and replace old units. The blue line is other starts.<br />First graph assumes 0.2% replacement rate, second assumes 0.5% replacement rate.<a href="https://t.co/G1PfVwX2Yj">https://t.co/G1PfVwX2Yj</a><a href="https://t.co/GbusiryRLp">https://t.co/GbusiryRLp</a> <a href="https://t.co/EetBQ7uClU">pic.twitter.com/EetBQ7uClU</a>
— Kevin Erdmann (@KAErdmann) <a href="https://twitter.com/KAErdmann/status/1458154908394287109?ref_src=twsrc%5Etfw">November 9, 2021</a>
Foreclosures & Forbearances
The darling of the doomsayers on YouTube never came around this year. We were warned that foreclosures would cause a housing bubble. They did not. We were warned that loans in forbearance would swamp us too. They did not.
Distressed properties just did not live up to the hype in 2021, so let's examine where we are today with mortgage delinquencies.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-loan-delinquencies-december-2021.jpg" width="880" height="641" alt="Graph depicts the number of US home loans delinquent over time" title="US Home Loan Delinquencies" class="img_box_center" />
This graph shows home loan delinquencies, meaning the number of mortgage holders who are late on their payments. Those that are 30 days late are plotted in blue, 60 days late are plotted in red, while those who are 90 days late or longer are plotted in gray. The green-dashed line plots the percentage of all mortgage holders who are late.
In 2010, nearly 11% of all mortgage holders were late on their payments. The market has been recovering each year until we hit the spike in 2020 caused by the arrival of COVID. The pre-covid delinquency rate was just over 3%, then suddenly it shot up to 6%. This spike brought out all the "experts" calling for a housing market collapse.
As we have seen, no collapse ensued. The delinquency rate has dropped below 4% and is improving rapidly. During this same time, the loans in forbearance have dropped from several million to right about 1 million today. Many of these are on a schedule and the loan servicers are working hard to restructure the loans.
Housing Equity - Why There Was No Foreclosure Crisis
When the foreclosure count blew up last year, some of the most prominent real estate reporters were claiming we were heading to a foreclosure crisis. I knew (and <a href="https://youtu.be/j-RbuNo-4Fc" title="My March 2021 Opinion On The Potential For A Foreclosure Crisis">reported</a>) that it wouldn't happen. Why? Because there is so much equity in the housing market.
<img src="https://assets.site-static.com/userfiles/663/image/us-home-equity-mortgage-debt-2022.jpg" width="880" height="641" alt="Graph plots the equity and debt levels in the US Housing Market over time" title="Equity & Debt In The US Housing Market Going In To 2022" class="img_box_center" />
This graph plots the aggregate home equity in the US housing market in blue along with the aggregate mortgage debt in red. The equity growth is running far faster than is the debt.
Look back in 2008 through 2010 when foreclosures were streaming into the market. The debt in the market far exceeded the equity, so these homes were upside down on their loans. Additionally, they entered a market that was already oversupplied for the low demand (caused by the tightening of loan qualification requirements.
Contrast that with today, where equity is running at about 27% for US home values. This means that distressed properties can enter the market, not as foreclosure sales, but as arms-length home listings. The majority of these sellers can sell the homes, pay off the debt, and walk away with some money.
So long as we are in an undersupplied housing market, equity growth will continue and there will be no threat from distressed properties. In fact, most foreclosures will be well-received by the market and most will sell with bidding wars taking place for the right to buy these homes.
The 'For Sale' Market Does Not Stand Alone
When the housing bubble burst back in 2006, we all thought it was due to a gross oversupply of homes. But that was not the case. That was a symptom in the 'for sale' market that was not mirrored in the 'for rent' market. So as not to make the same mistake, I like to track rental rate changes to see if the lack of supply on one side of the market is leading to an excess in the other (or if they are moving in the same direction).
<img src="https://assets.site-static.com/userfiles/663/image/us-housing-prices-rent-inflation-2021.jpg" width="880" height="641" alt="Graph that shows how home prices and rental rates have changed over time" title="US Housing Prices And Rent Fluctuations" class="img_box_center" />
This graph plots the change in home prices and rental rates in the United States since 2015. The home price index is shown in blue while the rental index is shown in red. Currently, homes are appreciating at just under 14% per year while rents are moving higher at more than 8% annually.
If we dig down further into rents, we see that recent months show rents growing even faster.
<img src="https://assets.site-static.com/userfiles/663/image/us-rental-rate-inflation-2021.jpg" width="880" height="641" alt="Graph plots the change in rental rates in the US over time" title="US Rental Rate Changes Over Time" class="img_box_center" />
When 2021 began (and through the first half of the year), rents were growing from 2% to 4% year-over-year. But once we hit the summer, rents started to move higher fast. In November, rents rose nearly 13% when compared to November of last year.
So it is clear that both the price of buying homes, as well as the cost of renting homes is moving higher at alarming rates. This is due to the limited supply of homes available in each respective market.<br /><br />The Likeliest Path For The Housing Market
We have addressed the current state of the US housing market, and we have reviewed the key market forces that will shape the landscape for both the 'for sale" and the "for rent' markets in 2022 and beyond. I guess this means it's time for me to share my forecast for the US housing market.
The two biggest issues facing the market are the creation of new homes and the availability of low-interest mortgage loans. We need builders to explode new housing starts, and we need interest rates to remain relatively low to allow buyers to consume the new inventory. So how do I see this playing out?
It all starts with inflation. I believe that inflation is running a lot higher than the Fed is willing to admit or react to for now, and I think the Fed's hand will be forced in 2022. I'm not wise enough to tell you how strongly the Fed will respond, but the health of the housing market requires rates to rise only marginally over time. I'm not so sure that will be possible though.
The Fed's reaction to inflation will lead to a chain reaction in the mortgage market, and I'm fairly confident that the days of 2% money are behind us and I'm concerned that so too are the days of 3% money. If we can keep rates below 4% for the entirety of 2022, I think the housing market will be able to keep churning along, albeit at a slower rate.
My forecast is for discretionary demand to fall. I expect total home sales to decline by 5% to 10% in 2022, and this is based upon my belief (hope) that the Fed doesn't follow its traditional model of stemming inflation. As rates rise, home affordability will decline, sticker shock will set in, and discretionary demand will recede.
I truly believe that the question of falling demand is "when; not if?"
Many would-be buyers will be pushed to the rental market, yet supply there is limited too. Many traditional "move-up" buyers will simply stay put, and both markets will constrict to mostly non-discretionary consumers. It will be the discretionary buyer leaving the market that causes the decline in demand.
Despite the reduction in discretionary spending on housing, the resulting demand will still leave the market short on inventory. Rents and prices will move higher, and the pace will be determined by the speed at which mortgage interest rates rise.
Perfect Conditions For The "Amazon Of Housing"
High costs and high rents have created an opportunity for a large, well-funded organization to get into the creation and leasing of residential properties. Think of it as the "Amazon of Housing."
The barrier to entry is going to swing the market away from homeownership and back towards a renter nation. A larger percentage of one's income will be required both for owning and for leasing, so it creates a great opportunity to amass the largest pool of residential properties and to wrestle some control over the decentralized housing market.
This is happening at a smaller scale in many areas of the country, but a giant could come in and completely reshape the residential property world. Now, I’m not saying this will become a fact in 2022, but I do believe it is starting now. The long-term future of housing will see some centralization of housing costs and controls.
If you are in a position where you did not plan to move until the next stage of your life, I would urge you to reconsider. Based upon the relatively low price of homes today, coupled with mortgage interest rates still remaining near record lows, I would recommend you consider creating a more long-term solution to your housing needs if possible.
The higher cost of homes and the higher cost of money might make the future move something unattainable. If you are happy where you are, speak with a mortgage lender about a refinance, as this is the cheapest money you will see for the rest of your life and it is well below the current rate of inflation.2021-12-20T03:51:00-07:002021-12-28T08:44:06-07:00Joe Manausatag:manausa.com,2012-09-20:25141Interesting Employment Dynamic Is Impacting US Home Sales<img src="https://assets.site-static.com/userfiles/663/image/employment-participation-rate-impacts-housing.png" width="600" height="400" alt="Prev 1 2 3 4 5 ... 76 Next As America has increased the vaccination rate, the anticipation of " back="" to="" normal="" for="" most="" businesses="" has="" grown="" title="Interesting Employment Dynamic That Is Impacting Home Sales" class="img_box_center" />Homes are selling at near-record levels, with home prices and rents rising at increasingly unhealthy rates. Many of our readers have asked where all these buyers are coming from, so I went out to find an answer.
Rather than merely focus on our local market (since this housing market behavior is happening all across the US), I have found a pocket of data on <a href="https://fred.stlouisfed.org/" title="Federal Reserve Bank of St. Louis">FRED</a> that might just have the answers that we seek. It measures the PARTICIPATION RATE in the labor market and segments the results into four age ranges.
First, I have included the list of all homes for sale in Tallahassee, just to affirm that homes are indeed selling like hotcakes.
Homes For Sale In Tallahassee<br /><br />Employment Dynamic Impacting Housing
As America has increased the vaccination rate, the anticipation of "back to normal" for most businesses has grown. With so many people out of work immediately after the pandemic started last year, one might expect that there would be people jumping at the chance to get back to work.
Apparently not.
Much of today's and recent past headlines have included reports of serious labor shortages and the difficulty in finding people to hire. Some speculate that many of the government programs have increased the ability for people to spend money while also decreasing the need for some to work, but that conversation is not what today's post is about. No, today we're going to look at a statistic called "participation rate" and how it appears to be impacting the housing market in 2021 and beyond.<br /><br />Labor Markets Participation Rates
This graph plots the participation rate for four key age groups in the US labor market. The "participation rate" is the percentage of people who participate in the labor force (meaning they either have a job or are looking for a job).
<img src="https://assets.site-static.com/userfiles/663/image/us-labor-participation-rate.jpg" width="880" height="641" alt="graph plots the participation rate for four key age groups in the US labor market" title="Labor Markets Participation Rates" class="img_box_center" />
The graph clearly shows the labor force's reaction to the pandemic in the first half of 2020. All four age ranges saw an immediate and sharp decline in the percentage of participants in the workforce. Since that time, the vaccination period responses have had differing reactions.
The 55 & Older age range (the purple line in the graph) has seen a continued decline, causing some to speculate that it's group is led by a wave of early retirees. On the other hand, the 25 to 54-year-old group (the green line in the graph) is just slightly below its pre-pandemic level, and this is the group that most influences the housing market.
People aged from 25 to 54 represent the largest housing-market active segment of our population, and the fact that this age group had only a slightly negative response to the pandemic in the labor market is one of the primary reasons the housing market is still going strong. The pandemic has pushed the Fed to keep interest rates low, so the combination of these low rates and a stable economy (for those in the prime homebuying ages) has kept the housing market healthy.
Jobs & Interest Rates
During my 30-year career selling homes in Tallahassee, I have seen the market respond most profoundly to changes in jobs (the ability to pay for a home) and the changes in mortgage interest rates (and how this impacts the monthly mortgage payment). For this reason, we'll keep reporting on the economy.
Right now, we are seeing unemployment decline and labor participation rise, both positive signs for the health of the US housing market. Contrarily, mortgage interest rates have ticked upwards and we're expecting them to move to higher ground sometime in 2022. So these two opposing trends will be competing to see which has the first or greater impact on the housing market in 2022.
If you have been waiting to buy a home, don't miss out on these historically low mortgage interest rates. As I have said quite often in the recent past, these are likely to be the lowest mortgage interest rates you see for the rest of your life!2021-12-13T03:56:00-07:002021-12-21T05:44:27-07:00Joe Manausatag:manausa.com,2012-09-20:22489Should You Wait For Home Prices To Come Down?<img src="https://assets.site-static.com/userfiles/663/image/home-prices-to-come-down.jpg" width="880" height="587" alt="You don't want to feel like a fool for buying a home right before home prices come tumbling down" title="Should You Wait For Home Prices To Come Down?" class="img_box_center" />Home prices are soaring, buyers are having to pay above most sellers' asking prices, and the housing market feels just like a feeding frenzy during Shark Week on the Discovery Channel.
You know you want to buy a home, but you also don't want to feel like a fool for buying a home right before home prices come tumbling down. So what do you do?
I have included a list of all the homes for sale in Tallahassee below, and you will find that the majority of homes below the top of the market are already under contract with buyers. The market today is as hot as a July day in Tallahassee.
Homes For Sale In Tallahassee<br /><br />History Of Home Prices
If you are somebody who is thinking about buying a home but you are waiting for home prices to come down, then this is the article for you.
Winston Churchill once wrote, "Those that fail to learn from history are doomed to repeat it." I suspect he got the idea from somebody else, but that's not the point. The point is that we can gain insight into what is going to happen in our future by studying what has occurred in our past.
So relating to real estate, if you believe home prices cannot come down, you might end up learning a tough lesson if you were to buy a home at the wrong time. And if you believe that home prices must come down, you too might learn a tough lesson by failing to buy while homes are relatively cheap.
Rather than have unfounded beliefs (in either direction), why not study the past and see what it suggests will occur moving forward? In order to gain the insight that we need, I have gathered eighty years of data on US home prices so that we can examine how home prices have risen and fallen through the years.
History Of US Home Prices
This graph plots 80 years of the average home price in the US.
<img src="https://assets.site-static.com/userfiles/663/image/home-price-change-over-the-years.png" width="880" height="641" alt="80-year history of US home prices graphed" title="History Of US Home Prices" />
The average price of homes sold in the US has risen 5.1% annually over the past eighty years. As you can see by studying the blue bars in the graph, it has not been a straight climb like the red arrow shows, rather we have seen some ups and downs over time.
In the past 80 years, average home prices have risen in 73 years while declining in just 7 years. In fact, five of the seven declining years were from 2007 through 2011, the result of many causes including significant over-building by us Home Builders.
This graph is very revealing. On average, home prices drop just one year out of every eleven, but in reality, we've seen just three periods where prices have dropped over the past eighty years. Two of the three periods were relatively insignificant (0.1% and 1.3% in singular, stand-alone years), but five of the seven were very significant and impactful.
From 1942 through 2006 (a 64-year span), home prices fell just twice, once for 1/10th of a percent, and once at 1.3%. Take that in. 62 years saw the average home price grow while just two years showed it decline.
History tells us that as a general rule, the average home price is going to rise. If we had social media from 1942 through 2006, how many "YouTube Experts" would have wrongfully called for falling home prices?
So instead of relying on the fear-mongers that get a lot of attention with their shocking headlines, whether it be about runaway prices or plummeting prices, let's evaluate current market conditions and the variables that will ultimately decide where home prices are heading.<br /><br />Supply And Demand Determine Price Changes
In all markets, from houses to pork bellies, the supply and demand relationship determines price movement. If you want a quick assessment of where prices are heading for the near future, a quick look at the supply and demand numbers will tell you what you want to know.
The following table shows the relative supply of homes for sale in Tallahassee, and it is similar to what you would find in most US housing markets, though there might be differences at higher price points. The numbers recorded are measured in "months of supply."
<img src="https://assets.site-static.com/userfiles/663/image/relative-supply-homes-for-sale-june-2021.jpg" width="677" height="641" alt="The relative supply of homes for sale in Tallahassee, Florida" title="Months Of Supply Of Homes For Sale" class="img_box_center" />
The magic number that we're looking for in the table is 6.0, which is typically regarded as a balanced market. Anything below 6 months of supply of homes is heading towards a sellers' market, and anything above 6 is heading towards a buyers' market.
The red-shaded areas and price ranges are all showing sellers' market conditions, and the bottom line for all areas of Leon County is fully shaded red, thus revealing a very strong sellers' market. This means that we expect to see home prices rise for the foreseeable future in Tallahassee (and in most other US markets too).
Market conditions won't turn around overnight, we can see it coming when these numbers start to move in opposite directions. In order to forecast those future moves, then we really must study the variables that impact both the supply and the demand for housing.
These would include population growth, mortgage interest rates, inflation, wage growth, construction costs, mortality rates, foreclosures and distressed homes, and several others though these are the ones most likely to have a significant impact on the housing market.
I have written on each of these on multiple occasions in the past few months, so I will summarize those articles (<a href="https://www.manausa.com/blog/tag/housing-market-variables/" title="Articles that discuss housing market variables">here is a reading list if you'd like more details</a>) with the following:
Homebuilders have failed to deliver homes that our growing population needs (due to many reasons like the rising cost of land and materials and labor), creating a shortage of homes for sale. This shortage has created pricing pressures. Declining mortgage interest rates have increased demand further exacerbating the supply shortage, causing a run on homes and double-digit appreciation rates. This demand will not likely cool much until mortgage interest rates rise.
Unlike 2005 when the market was rocketing forward, the supply in today's market comes from buyers moving up, over, or around. Were interest rates to spike higher killing demand, it would have a similar result in the supply, because new construction has not been a great factor. A cooling market is not going to leave us with a devastating supply imbalance that needs ten years to be consumed as we saw in 2007.
For readers who want to ask "what about foreclosures and homes in forbearance, I have covered that in numerous articles and videos. I recommend you start with <a href="https://www.manausa.com/blog/distressed-properties-july-2021/" title="loan status changes and forbearance plans">Will Distressed Properties Begin To Dominate The Housing Market Again?</a>.
My Concern For The US Housing Market
Unlike many people who provide regular written and video opinions on the US housing market, I have little concern about a bubble or falling prices in the near future. Most signs point in a different direction.
But I do have a huge concern for what I believe will be a generational change in the housing market. Affordability. Inflation.
Our population has grown and we need more homes. The new homes are costing significantly more than did the old homes. If you think that future construction costs will be lower than pre-COVID construction costs, you are among the minority (though there are some COVID-related spikes that will come back down towards pre-COVID prices).
In a future of higher prices and higher mortgage interest rates, I see a soaring home affordability concern that only wage inflation will be able to address. Right now, we are seeing huge wage inflation at the bottom of the pay scale (by voter mandate in Florida and many other states), but we'll need to see that surge throughout the other pay scale ranges before it begins to aid in the (lack of) affordability of homes.
Right now, home affordability is excellent. Only 5 of the past 30 years have been better. But when rates start to climb as a result of the Fed combatting inflation, home affordability will quickly fall to the "worst year on record." This is my greatest concern for the housing market.
Don't expect home prices to come down, rather expect to see demand plummet and the overall market will see the homeownership rate decline. Many families will simply not be able to afford a home of their own and those who today would be starter-home owners tomorrow will be tenants.
Buy Now Or Wait?
All of the housing market variables point to rising prices. Most of the economic variables seem to point to economic recovery, and thus we should have an expectation of rising mortgage interest rates when the Fed raises the federal funds rate.
Somebody contemplating buying a home should recognize that tomorrow's prices will be higher than today's prices, and he will be borrowing the money for the home at a higher mortgage interest rate than what he would have to pay today.
Buy a home now. Get as much home as you feel comfortable with because it's likely you won't' be able to afford to move up in the future. Lock in your purchase with a 30-year, fixed-rate mortgage loan. We are heading towards a time of high inflation, one great hedge is to own assets that will inflate faster than your cash.2021-07-26T02:51:00-07:002021-08-10T05:43:43-07:00Joe Manausa