The latest numbers are out and the Case Shiller Home price index is up 11%, a level not seen since previous to the Great Financial Crisis of 07-08. All of us remember how crazy that time was and if we were not owners ourselves at the time we knew many people who were and possible went through some painful financial moments around their real estate. A few people have asked me about whether this is a bubble and I don’t think it is. I will share my reasons in this weeks Inside Look at Building Towards Wealth.
1) The Supply of Homes is Very Limited: In real estate supply and demand are measured in months supply of inventory. The months’ supply is the ratio of houses for sale to houses sold. This statistic provides an indication of the size of the for-sale inventory in relation to the number of houses currently being sold. The months’ supply indicates how long the current for-sale inventory would last given the current sales rate if no additional new houses were built.
The most recent St Louis Fed numbers show that our supply is at near historic lows. One reason could be the number of people looking to buy homes with more space. While this does account for part of it, perhaps the even bigger reasons is that builders have not been making new homes at an adequate rate.
The housing bubble of the mid 2000’s hurt many homebuilders when it popped. They have been very reluctant to ramp up production ever since. Up until recently, as these numbers show, new home starts have been well below historic numbers.
Economics 101 says that if supply is low prices will increase as long as demand is high. Which brings us our second reason
2) The Housing Demand is Real: During the housing boom in the mid-2000s, there was what Robert Schiller called irrational exuberance. Without considering historic market trends, people got caught up in the frenzy and bought houses based on an unrealistic belief that housing values would continue to escalate.
During the 2008 housing crisis, there was a high demand for homes and the mortgage industry fed into the exuberance by loaning to just about anyone and everyone. They did so by offing easy access to loans with little or no money down, flexible, or even absent underwriting guidelines, including “stated income” and “low doc” mortgages.
The Mortgage Credit Availability Index measures how hard (or easy) it is to receive a loan. The lower the number, the harder it is to get a loan. In 2006, the number was at an all-time high of 868, meaning it was exceptionally easy to get a loan. Today, it is around 122.5.
The combination of the pandemic, which has led many people to reconsider what they want their home to be, Millennials, who begin turning 40 this year, finally getting to the point where they can consider purchasing homes and the continued low interest rate environment will continue to fuel demand for the foreseeable future.
3) It’s All About the Equity: During the last housing boom homeowners started using their homes like their own personal ATM’s. According to Freddie Mac homeowners took out $824 billion dollars from their equity in 05-07. That left many homeowners with little or no equity in their homes at a critical time. As prices began to drop, some homeowners found themselves in a negative equity situation where the mortgage was higher than the value of their home. Many defaulted on their payments, which led to an avalanche of foreclosures.
Current cash out refi volume is less that a third of what is was back then. Maybe, just maybe people learned a lesson from the last time.
According to his report 17.8 million residential properties in the United States were considered equity-rich, meaning that the combined estimated amount of loans secured by those properties was 50 percent or less of their estimated market value.
The count of equity-rich properties in the fourth quarter of 2020 represented 30.2 percent, or about one in three, of the 59 million mortgaged homes in the United States. That was up from 28.3 percent in the third quarter of 2020, 27.5 percent in the second quarter and 26.7 percent in the fourth quarter of 2019, despite the ongoing economic damage caused by the worldwide Coronavirus pandemic.
Lack of equity was just one of the dominoes in the last housing bubble but one that does not appear to exist today
I understand why people are concerned about being in another real estate bubble. It was less than a decade and a half that we went through one. As I talked about here the concern about bubbles all around us exists. A solid plan can insulate you from most of the effects of these bubbles but the housing market is not one I would be concerned about at this time.
