With spring selling season upon us, let’s take a trip through the latest data.
Demand is robust for home buying. The oldest millennials are moving out of the cities and apartments, looking to establish roots by purchasing homes. Applications for new purchases are at five-year high. This is despite mortgage rates being at the highest level since 2011.
Supply available for sale keeps dwindling, down to the lowest level in the last 35 years. Last March, there were 1.8 million single family homes and condos for sale. Today there are 7% less. Supply was the major problem in the housing bubble, but in the opposite direction. The market topped out at 4 million homes available for sale in 2007; this was too much for the market to absorb. There simply were not enough household formations to handle all of the houses that were built.
With high demand and low supply, Economics 101 forecasts prices must adjust higher. That is exactly what is happening. The Case-Shiller Home Price Index tracks the 20 largest metropolitan area home prices. As shown in blue, prices hit new all-time highs this year. On an inflation-adjusted basis, however, prices are not back at the bubble peak of the last cycle, but more like 2004 prices (as shown in orange).
As shown with the white arrows, the rate of change this time is slower during the last few years than in the housing bubble. For four years from 2003 to 2006, prices rose 35% on an inflation-adjusted basis. From 2014 to 2017, prices rose 17%, or at half the rate.
Today, the trend points higher for prices. Many people refinanced and locked in mortgage rates below 4% over the past few years. If they were to move today, they would end up paying more in interest expense and a higher price for a home. This does not make a ton of sense. This could be why home improvement stocks have done so well the last few years, as homeowners looked to stay put and improve their own place.
While real estate is local, the housing supply available for sale is a national phenomena. With robust demand, this spring housing season looks to be favoring the sellers.
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