Housing is an important component of the U.S. economy. Monitoring this sector’s strength and growth trend has forecasting value. Like any industry, housing has its own cyclical pattern, which was on display over the last decade.
According to the most fundamental concept of Economics 101, supply and demand drive price levels. At the peak in 2007, there were 4 million homes for sale. Compared to the past, this was a large spike in volume. Prices ended up falling for the next six years in a row.
Today, there are 1.8 million homes for sale. The housing inventory fell 7% over the last year. Thus, prices continue to rise.
A quick look at the Case-Shiller Home Price Index for the 20 largest metropolitan areas show housing prices near the peak of 2007. Real estate prices are local, so there is large dispersion in the data. San Francisco real estate prices are much higher than ten years ago thanks to a booming technology industry. Detroit, unfortunately, is not.
If one adjusts the price index for inflation, we see a different picture painted by the chart below. Prices are higher than five years ago, yet not back to the peak levels. It is more like late 2003 than 2007 compared to the last cycle.
Most asset prices are at all-time highs. The Federal Reserve’s formula of keeping interest rates low, just like in the 2000s, helped boost stocks, bonds, and real estate prices. This does not mean a price decline is imminent. Supply is certainly low. Many people locked in low mortgage rates over the last several years, so the motivation to move is lower. At the same time, millennials are increasingly entering prime home buying years. Baby boomers are considering where to live in retirement, with surveys showing some want to downsize while others want more space.
Leverage levels are much lower for households than ten years ago. With lower interest rates, the debt service levels as a percent of income are much lower. This indicates a much healthier balance sheet for consumers with the ability to take on debt. Mortgage rates are higher than a year go, but mortgage applications continue rising.
Anecdotally, there does seem to be much more chatter about house flipping and television shows dedicated to the rehab of houses. For areas with highly competitive bidding and much more availability of leverage, this could pose a risk.
Putting this all together means demand is robust. Housing continues to recover at the macro level, with 9% growth in single family housing construction. There are pockets of frothiness in certain cities and regions. Everyone’s favorite house searching site, Zillow, forecasts the median home price to increase by 2.6% over the next year.
Housing should be a solid contributor to economic growth the next few years. This means it will likely be a source of jobs, wage growth, and profits rather than the economic drag it was following the financial crisis.
This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.