Today’s Housing Market Is The Exact Opposite Of The Last Housing Crash
Friday December 20, 2019
Wrapping your head around the housing market can be confusing. So many news reports, so many opinions, and with home prices at or near all-time highs across most markets in the U.S., it can become difficult to make a decision.
If you’ve found yourself feeling fearful or full of trepidation about the housing market, keep in mind supply and demand generally dictate the direction prices will move for any asset class (real estate included).
So let’s waive aside the opinions and biased perspectives to look directly at the supply and demand for U.S. housing right now.
As you are likely aware, interest rates are down roughly .85% since since their 2018 highs. With interest rates down roughly twenty percent, mortgage payments are more affordable than they were last year.
With interest rates and mortgage payments decreasing, homebuyer’s purchasing power is increasing. Meaning today you can afford a more expensive home for the same monthly payment.
When we talk about a homebuyer’s purchasing power, we need to analyze three data points.
The price of the homes you are interested in buying. In most areas of the country, the price of housing has gone up since 2018 (which is not good for new buyers but great for buyers whom bought in previous years). Over the last twelve months, housing values have increased at about 5.7% nationally.
That means a $350k home twelve months ago, is now selling for $369,950. Not a bad year of appreciation for those homebuyers who were able to purchase in 2018 or before.
Mortgage interest rates. Fortunately we’ve seen lower interest rates throughout much of 2019, which has made a drastic impact on housing affordability for new buyers.
Wages or income you earn. Based on national averages, income in the U.S. have increased approximately 1.5% over the last twelve months as well, making housing payments a smaller portion of many household’s monthly budget.
When we break it down like this, it’s easy to understand that housing is becoming more affordable for most, and the lower payments and greater purchasing power will incentivize more renters to enter the housing market in 2020.
What I found somewhat surprising is exactly how affordable housing is for the average American in relation to historical averages.
Historically U.S. households have spent 21.2% of their gross monthly income towards their mortgage expense. Since June of 2018 that monthly housing payment as a percentage of income has been steadily decreasing and as of September 2019, sits at just 15.2% of household income.
Simultaneously, as lower interest rates and higher wages are making housing more affordable than historical averages, we are also seeing sentiment towards housing continue to improve.
According a survey by Porch.com, Americans choose real estate as the safest investment over the next ten years. Even safer than a savings account!
With housing affordability below historical norms and real estate being voted the safest investment over the next decade, it’s probable that strong demand for housing will continue.
So what about supply? If home builders overbuild, there is a possibility we could see another bubble and eventual housing crash.
The most recent data on U.S. Building Permits tell us that is not a likely problem at this point. In fact, going back to 1960, U.S. Building Permits ranged from below six hundred thousand to approximately two million four hundred thousand permits.
Between 1994 and 2009 (fifteen straight years) U.S. Building permits exceeded one million four hundred thousand per year and reached a peak of approximately two million four hundred thousand.
That fifteen year stretch of overbuilding resulted in a significant oversupply of housing that eventually ended in the Housing and Mortgage Meltdown.
Since 2009, the exact opposite has happened. U.S. home builders have barely exceeded one million four hundred thousand new U.S. Building Permits.
Which means we find ourselves in the opposite position we were in last time housing prices were at an all-time high.
Instead of finding ourselves at the highest prices of all time with the highest amount of inventory and new home construction, we find ourselves at the lowest number of new homes built in any ten year stretch since 1960.
With new construction well below historical norms, and future strong demand for housing due to greater purchasing power, it’s hard to see housing prices not continuing to move higher from here.
If you are seeking additional clarity, information, and advice on the purchase of your next home, we’d love to hear from you.
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