Is This a New Housing Boom?

Posted: Apr 29, 2016 12:01 AM
Is This a New Housing Boom?

Housing prices have been rising dramatically. To some, it looks like a new housing boom. With multiple offers, sales prices higher than the list prices and homes selling in just hours, many people are asking the question, “how long can this last?”

There are some important signs worth noting. In many cities, prices have met or barely exceed their historical highs set before the housing crash. This means this perceived-boom is really little more than a recovery. By contrast, Lawrence Yun, of the National Association of Realtors recently reported, "Demand is starting to weaken in some areas, particularly in the West, where the median home price has risen an astonishing 38 percent in the past three years.” This may be a warning-sign or just a temporary reprieve from hysteria. We’ll know soon.

In housing-markets where values have somewhat exceeded the records set before the crash, demand seems to be tapering a bit. In others, it’s climbing rapidly.

Most of the new inventory being built by homebuilders is in the suburbs, leaving very little affordable inventory in popular urban areas. In these areas, home-sellers find a bit more of a challenge competing with the homebuilders and their ridiculously-upgraded model homes.

Nationwide there is just 4.5 months of inventory. This means if no other homes came on the market, it would take 4.5 months to sell all the homes presently for sale. Generally, a buyers’ market starts developing at about six months of inventory. The best way to describe the current housing market is that it's slightly undersupplied. This means, at present inventory levels, we should expect appreciation in the five to seven percent range over the coming year.

One narrative we keep hearing from the National Association of Realtors (and other self-serving punditry) is that we have an extreme housing shortage. This just isn't true. Many of the industry ‘experts’ fall prey to peddling self-serving propaganda instead of objective analysis. The real story on inventory is that it's just healthy. It’s neither too high nor too low.

As of this writing, reports that the average interest rate on a 30 year fixed-rate mortgage is 3.72 percent. It would be accurate to opine that if interest-rates stay below 4 percent much longer that our inventory will decrease even more - then we’ll have a true shortage. However, as rates began to rise, so will inventory. At just 6 1/2 months of inventory, home-prices in many markets will stagnate or even depreciate.

Our present housing undersupply-crisis is quality homes in established communities and neighborhoods. There are plenty of homes for sale; just not many that meet the demands of today's buyer. In some of the more expensive ZIP codes, we are seeing homes that cost hundreds of thousands of dollars being purchased and torn down to build new seven-figure McMansions.

For buyers on more of a budget, the only option remaining is renovation of an existing home. While appreciation of home prices was absent for most of the past decade, inflation of building costs has not been. It costs a lot more today than it did in 2006 to build a new home making that an unattractive, if not unaffordable, option for many. This is certainly one of the factors putting upward pressure on resale-housing prices across America.

Most of what's for sale in the resale-housing market is junk. It's overhang from the foreclosure crisis, homes with delayed maintenance or rental homes that have been abused by tenants. These low-quality options are a symptom of the housing-crash and are now hitting the market due to higher demand and prices.

Buyers are turning to renovation loans or home equity lines of credit to repair the ‘junk.’ The average renovation cash-out refinance in 2015 was $65,000. The average home-equity-line-of-credit was $115,000. These numbers are still half of what they were in 2006; but, the numbers are on the rise. Buyers and existing-homeowners are opting to renovate and modernize homes instead competing for the best homes. The best (move-in ready) resale-homes are selling in hours or days and for well over list price in most markets.

There's nothing about the existing housing market that appears to be a boom. It’s a market dynamic we’ve never seen before and most ‘experts’ are struggling to read. It’s mostly a recovery resulting from the pent-up demand of years of distress. Wages are too stagnant to drive housing prices higher. Instead interest rates are so low it's allowing people with stagnant salaries to afford a higher priced home (creating faux appreciation). In addition, the US housing market has never faced the volume-phenomenon of recovery-buyers that are now entering the market.

Recovery-buyers are buyers who faced short-sale, foreclosure or bankruptcy between 2007 to 2013. This represented about 500,000 people re-entering the housing market in 2015. It's expected 2016 will bring approximately 1 million new buyers back to the market that previously could not buy a home. This number is expected to peak over the next couple of years at 1.5 million new buyers per year.

My sixth-sense of this housing-market tells me we have one to two years of housing appreciation remaining, followed by stagnant prices and rising inventory thereafter. If prices increase by more than 20% over the next couple of years, without commensurate improvement in wages, that will present another bubble. When interest rates start rising, we have to remember that buyer affordability is reduced by 11% for every one-percent increase in interest rates. If prices overshoot in this uptick, they will be unaffordable when rates rise.

For housing investors, simply stay focused on inventory-levels. When inventory climbs consistently over a six-month period and approaches six or more months in your market, it's time to batten up the hatches - financially and figuratively speaking of course.