Since the depths of the Great Recession in 2008, the housing market has struggled to regain its footing. There always seems to be a market imbalance that prevents solid growth. Initially, it was the tidal wave of mortgage failures that triggered a collapse in values and oversupply of homes. Currently, an undersupply of homes and rising prices are throttling a potentially healthy housing market.
Despite regional differences, from 2014 to 2016, home prices nationally grew at a relatively healthy 5%. So far in 2017, the annualized rate has been increasing, with the March value at 5.8% according to the S&P Case-Shiller national index. That’s the largest annualized increase in three years.
Out of Balance
During the housing crisis, plunging home values led to foreclosures and other economic hardships as homeowners suddenly owed more on their home than it was worth. So, aren’t rising home prices a good thing?
The key is that a rise or fall in prices should be measured and proportionate to other aspects of the economy. Prices are driven by basic supply and demand – too many people fighting to own too few homes will result in rising prices, as we are seeing today. The National Association of Realtors (NAR) shows the current national inventory of existing homes at a 4.2-month inventory – a drop from the 4.6-month inventory one year ago and well below the 6-month inventory considered the sign of a balanced, healthy market.
The subsequent home price increases are outpacing wage increases. Bloomberg contrasted the year-over-year percent change in the median selling price of previously owned homes with the year-over-year increase in inflation-adjusted disposable income (in other words, funds available to apply toward new housing costs) since 2014. As of February 2017, home prices increased by 7.7% while disposable income increased by only 2% – the largest discrepancy found in the period.
This effect shifts the entire market downward, pushing first-time homebuyers toward less-expensive homes, if not out of the market entirely. Meanwhile, current homeowners wishing to trade up are caught in a double bind. While an increase in their home values is a positive with respect to wealth and assets, it makes their existing homes harder to sell and their preferred upgrade home harder to buy.
Trulia’s 2017 Q1 National Inventory and Price Watch illustrates the problem. The inventory of homes in the 100 largest US metro areas was down across the board year-over-year in Q1 2017, but the supply of premium homes (median list price of $614,143) fell 1.7% while trade-ups (median $289,455) fell by 7.9% and the important starter home market (median $165,015) fell by 8.7%.
Put simply, there are plenty of homes available for people who can’t afford them.
It’s More than Supply and Demand
Four other factors aggravate the effect on starter homes.
- Lenders have tightened loan qualification requirements since the housing crisis.
- Builders are less motivated to build starter homes because the margin is smaller.
- Historically low interest rates have been rising and are likely to keep doing so.
- Millennials are having a harder time entering the housing market because of higher levels of student loan debt and job/wage setbacks encountered during the Great Recession.
While starts of all homes, including starter homes, are expected to increase and resolve that constraint, the other factors show little signs of improvement.
Lenders have little regulatory latitude to loosen up loan requirements – or reason to, since the shortage is not on the demand side. (Loan standards have relaxed some recently, but are still tighter than the years before the crisis.) The Federal Reserve intends to raise interest rates to more historically normal levels – it’s just a question of when rates rise and by how much. Millennials may be making some gains, but wage increases on average are more likely to be applied to student loan debt than to saving up for down payments.
Without sufficient activity in starter homes, it’s unlikely that the housing market will gain enough traction to show healthy growth – so expect the same trend of two steps forward and one step back for the foreseeable future.
Supply and demand may be out of kilter on the national scale, but all you really care about is the supply and demand on the local scale.
If you are looking to buy a home, how many vacant homes with your preferred characteristics exist in the area you wish to live in, within the price range that you can afford to pay? Against how many people are you competing for that style of home? Conversely, if you need to sell your home, how many other homes exist in your area at your home value, is your home priced reasonably relative to those homes, and how many people are looking to buy within your small slice of the market?
Your local market may run counter to national trends. As a buyer, study your local market in detail using the resources available to you, from listings in the local paper to online resources to local real estate professionals. Outline what is most important to you in a home and what aspects are deal-killers. Put away funds each month toward a down payment so you can strike when the opportunity arises. Then you are in position to take advantage of the best deal available within your market at the time you decide to buy.
In one aspect, real estate is no different from stocks. The key in both cases is “Buy low, sell high,” and low and high are always relative.