Oh, I hear it, too –– ‘These house prices are unsustainable’ and ‘just wait until the interest rates rise’ or ‘remember what happened last time.’
< yawn >
When it comes to housing, nearly everyone has become a Chicken Little and is predicting that the ‘sky is falling!’ As a matter of fact, the whispers of an overheated market date back to 2015 when home prices started rebounding quickly from the depths of the 2008 crash.
Doomsaying is an industry unto itself so forgive me if I don’t pay attention to the people who predict gloom for a living. If you keep saying the same thing for long enough, eventually you will be right.
Personally, I would prefer to be right more often than ‘eventually.’
The Real Deal
Instead of blindly assuming that prices are going to come crashing down because they went up, lets look at where the market actually stands:
- Building starts are still well below what is required to keep pace with natural demand increases, much less the accrued backlog of undersupply. We are 3-5M homes undersupplied depending on which study you read.
- In order to erase the 3-5M house deficit, we would have to double housing production for nearly a decade –– and have you seen the cost of lumber or the lead time on appliances?
- Not only are we not building enough houses, we are also lagging well behind in lot development –– remember, you can’t build a home where there isn’t a lot.
- The housing issues we are experiencing today did not begin with COVID, it began when the Great Recession decimated the construction industry beginning in 2006 –– and we have not recovered.
- Furthermore, the issues facing the development industry are not easily fixed.
- Affordable housing, or even housing that approaches median pricing, is impossible to build and thus the supply of housing below $500K is pretty much fixed.
- Large scale / institutional investors are purchasing up to 30% of the available houses in many markets, further suppressing supply.
- Many builders are actually electing to build new homes for rent and keeping them versus selling them upon completion, meaning fewer new homes.
- The average time in a home has nearly doubled from 7 to 13 years –– so supply side resales are not going to supply the market with the needed inventory.
- Rents are up 15-30%, so not only is renting a poor financial alternative, renters are desperately trying to escape tenancy which drives up demand.
- Vacancy in the rental sector is at an all time low, pushing up rents further.
- Foreclosures just hit an all time low, despite the naysayer’s predictions otherwise.
- Unlike 2008, there is little no risk from the mortgage market right now –– of the $8T in outstanding mortgagee debt, over 80% of it is financed at or below 4% and with a fixed rate.
- Unlike 2008, the collective amount of homeowner equity in the US is 4-6X what it was in 2006.
- Unlike 2008, subprime loans (a.k.a. ‘liar’ loans) are at most 1% of the mortgage market today –– in 2006 they comprised close to 40% of the market.
- Rates rising doesn’t eliminate buyers, it just moves buyers down a notch in terms of affordability. Rising rates actually increase competition at the middle and lower price points, not decrease it.
- Substantially more cash is being used to purchase housing than in 2006-80, so rates increasing is not as impactful as it normally would be.
- Just so you realize, from 1980 to 2000, the median house price tripled, despite mortgage rates no lower than 7% (and as high as 18%!)
Other Economic Factors
- If someone’s analysis of the housing market doesn’t include the word ‘Millennial’ then they haven’t analyzed the demand side of the equation.
- Gas prices are increasing the pressure on urban centers to provide more housing options –– which is precisely where adding inventory is the most difficult.
- Inflation (which is good for real assets) is at generational highs.
- If the housing market crashes, it will not be because of housing, but because of some other factor or cause that takes down all markets, not just housing.
We’ve Never Been Here Before
No housing market has ever been exposed to the combination of factors that are in play today –– a rapidly expanded money supply, record setting inflation, disrupted supply chains, a pandemic, global unrest, a systemic lack of building, population growth, ‘Sun Belt-friendly’ migration patterns, and the decoupling of geography from employment (in other words, live where you want to and use Zoom.)
There is no precedent for this market so using using history as a guide is pointless.
Remember, market corrections occur when prices are overvalued, and not just because prices went up.
The bottom line is that if someone predicts a housing crash but doesn’t say why, when and/or by how much, then they should be ignored.
Millennials turning 30 + 5M homes undersupplied is what is today’s market –– and we can’t fix that overnight.