How often do families move?The National Association of Realtors (NAR) keeps historical data on many aspects of homeownership. One of their data points, which has changed dramatically, is the median tenure of a family in a home, meaning how long a family stays in a home prior to moving. As the graph below shows, over the last twenty years (1985-2008), the median tenure averaged exactly six years. However, since 2014, that average is almost ten years – an increase of almost 50%.
Why the dramatic increase?The reasons for this change are plentiful! The fall in home prices during the housing crisis left many homeowners in a negative equity situation (where their home was worth less than the mortgage on the property). Also, the uncertainty of the economy made some homeowners much more fiscally conservative about making a move. With home prices rising dramatically over the last several years, 95.3% of homes with a mortgage are now in a positive equity situation, according to CoreLogic. With the economy coming back and wages starting to increase, many homeowners are in a much better financial situation than they were just a few short years ago. One other reason for the increase was brought to light by NAR in their 2018 Home Buyer and Seller Generational Trends Report. According to the report,
“Sellers 37 years and younger stayed in their home for six years…”These homeowners, who are either looking for more space to accommodate their growing families or for better school districts to do the same, are likely to move more often (compared to typical sellers who stayed in their homes for 10 years). The homeownership rate among young families, however, has still not caught up to previous generations, resulting in the jump we have seen in median tenure!
What does this mean for housing?Many believe that a large portion of homeowners are not in a house that is best for their current family circumstance; they could be baby boomers living in an empty, four-bedroom colonial, or a millennial couple living in a one-bedroom condo planning to start a family. These homeowners are ready to make a move, and since a lack of housing inventory is still a major challenge in the current housing market, this could be great news.
[caption id="" align="alignnone" width="648"] List your house Now[/caption] If you are debating whether or not to list your house now, here is the #1 reason not to wait!
Buyer Demand Continues to Outpace the Supply of Homes for SaleThe National Association of Realtors’ (NAR) Chief Economist Lawrence Yun recently commented on the current lack of inventory:
“Inventory coming onto the market during this year’s spring buying season – as evidenced again by last month’s weak reading – was not even close to being enough to satisfy demand. That is why home prices keep outpacing incomes and listings are going under contract in less than a month – and much faster – in many parts of the country.”The latest Existing Home Sales Report shows that there is currently a 4.1-month supply of homes for sale. This remains lower than the 6-month supply necessary for a normal market, and 6.1% lower than last year’s inventory level. The chart below details the year-over-year inventory shortages experienced over the last 12 months: Anything less than a six-month supply is considered a “seller’s market.” There is less than a six-month supply in most towns in Nassau and Suffolk counties. If you would like to see absorption rates for many Nassau and Suffolk County towns compiled over the past 12 months - click here.
Bottom LineLet’s get together to discuss the supply conditions in your neighborhood so that I can assist you in gaining access to the buyers who are ready, willing, and able to buy right now!
Homes More Affordable TodayRising home prices have many concerned that the average family will no longer be able to afford the most precious piece of the American Dream – their own home. However, it is not just the price of a home that determines its affordability. The monthly cost of a home is determined by the price and the interest rate on the mortgage used to purchase it. Today, mortgage interest rates stand at about 4.5%. The average annual mortgage interest rate from 1985 to 2000 was almost double that number, at 8.92%. When comparing affordability of homeownership over the decades, we must also realize that incomes have increased. This is why most indexes use the percentage of median income required to make monthly mortgage payments on a typical home as the point of comparison. Zillow recently released a report comparing home affordability over the decades using this formula. The report revealed that, though homes are less affordable this year than last year, they are more affordable today (17.1%) than they were between 1985-2000 (21%). Additionally, homes are more affordable now than at the peak of the housing bubble in 2006 (25.4%). Here is a chart of these findings:
What will happen when mortgage interest rates rise?Most experts think that the mortgage interest rate will increase to about 5% by year’s end. How will that impact affordability? Zillow also covered this in their report: Rates would need to approach 6% before homes became less affordable than they had been historically.
Bottom LineThough homes are less affordable today than they were last year, they are still a great purchase while interest rates are below the 6% mark.
With home prices rising again this year, some are concerned that we may be repeating the 2006 housing bubble that caused families so much pain when it collapsed. Today’s market is quite different than the bubble market of twelve years ago. There are four key metrics that explain why:
- Home Prices
- Mortgage Standards
- Mortgage Debt
- Housing Affordability
1. HOME PRICESThere is no doubt that home prices have reached 2006 levels in many markets across the country. However, after more than a decade, home prices should be much higher based on inflation alone. Frank Nothaft is the Chief Economist for CoreLogic (which compiles some of the best data on past, current, and future home prices). Nothaft recently explained:
“Even though CoreLogic’s national home price index got to the same level it was at the prior peak in April of 2006, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were.” (emphasis added)
2. MORTGAGE STANDARDSSome are concerned that banks are once again easing lending standards to a level similar to the one that helped create the last housing bubble. However, there is proof that today’s standards are nowhere near as lenient as they were leading up to the crash. The Urban Institute’s Housing Finance Policy Center issues a Housing Credit Availability Index (HCAI). According to the Urban Institute:
“The HCAI measures the percentage of home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”The graph below reveals that standards today are much tighter on a borrower’s credit situation and have all but eliminated the riskiest loan products. [caption id="attachment_37442" align="alignnone" width="650"] Housing Credit Availability Index[/caption]
3. MORTGAGE DEBTBack in 2006, many homeowners mistakenly used their homes as ATMs by withdrawing their equity and spending it with no concern for the ramifications. They overloaded themselves with mortgage debt that they couldn’t (or wouldn’t) repay when prices crashed. That is not occurring today. The best indicator of mortgage debt is the Federal Reserve Board’s household Debt Service Ratio for mortgages, which calculates mortgage debt as a percentage of disposable personal income. At the height of the bubble market a decade ago, the ratio stood at 7.21%. That meant over 7% of disposable personal income was being spent on mortgage payments. Today, the ratio stands at 4.48% – the lowest level in 38 years!
4. HOUSING AFFORDABILITYWith both house prices and mortgage rates on the rise, there is concern that many buyers may no longer be able to afford a home. However, when we look at the Housing Affordability Index released by the National Association of Realtors, homes are more affordable now than at any other time since 1985 (except for when prices crashed after the bubble popped in 2008). [caption id="attachment_37443" align="alignnone" width="650"] Housing Affordability Index[/caption]
Bottom LineAfter using four key housing metrics to compare today to 2006, we can see that the current market is not anything like the bubble market.
[caption id="" align="alignnone" width="648"] Home Appreciation[/caption] Home appreciation has risen dramatically over the last twelve months. In CoreLogic’s most recent Home Price Index Report, they revealed that national home prices have increased by 6.7% year-over-year. CoreLogic broke down home appreciation even further into four price ranges, giving us a more detailed view than if we had simply looked at the year-over-year increases in national median home price. The chart below shows the four price ranges from the report, as well as each one’s year-over-year growth from February 2017 to February 2018 (the latest data available). It is important to pay attention to how prices are changing in your local market. The location of your home is not the only factor that determines how much your home has appreciated over the course of the last year. Lower-priced homes have appreciated at greater rates than homes at the upper ends of the spectrum due to demand from first-time home buyers and baby boomers looking to downsize.
Bottom LineIf you are planning to list your home for sale in today’s market, let’s get together to go over exactly what’s going on in your area and your price range.
There are many unsubstantiated theories as to why home values are continuing to increase. From those who are worried that lending standards are again becoming too lenient (data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of “irrational exuberance” (this is also untrue as prices are not at peak levels when they are adjusted for inflation), there seems to be no shortage of opinion. However, the increase in prices is easily explained by the theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase. It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate (see chart below). [caption id="attachment_37411" align="alignnone" width="650"] Home Prices Are Increasing[/caption] According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes for sale has been below six months for the last five years (see chart below). [caption id="attachment_37412" align="alignnone" width="650"] Available Housing Inventory[/caption]
Bottom LineIf buyer demand continues to outpace the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.
- According to the latest Existing Home Sales Report from the National Association of Realtors, sales grew 1.1% in March to an annual pace of 5.60 million.
- This is the strongest pace since November of 2017.
- Inventory levels dropped year-over-year for the 34th consecutive month and are now 7.2% lower than March 2017 levels, representing a 3.6-month supply.
[caption id="" align="alignnone" width="648"] Buying a Home[/caption] The results of the 2018 Rental Affordability Report from ATTOM show that buying a median-priced home is more affordable than renting a three-bedroom property in 54% of U.S. counties analyzed for the report. The updated numbers show that renting a three-bedroom property in the United States requires an average of 38.8% of income. The least affordable market for renting was Marin County, CA, just over the Golden Gate Bridge from San Francisco, where renters spend a staggering 79.5% of average wages on rent, while the most affordable market was Madison County, AL where 22.3% of average wages went to rent.
Other interesting findings in the report include:
- Average rent rose faster than income in 60% of counties
- Average rent rose faster than median home prices in 41% of counties
- While median home prices rose faster than average rents in 58% of counties
Bottom LineBuying a home makes sense socially and financially. If you are one of the many renters out there who would like to evaluate your ability to buy this year, let’s get together to find your dream home.
- A trend that has been emerging for some time now is the contrast between inventory & demand in the Premium & Luxury Markets vs. the Starter & Trade-Up Home Markets and what that’s, in turn, doing to prices!
- Inventory continues to rise in the luxury & premium home markets which is causing prices to cool.
- Demand continues to rise with low inventory in the starter & trade-up home markets, causing prices to rise!
[caption id="" align="alignnone" width="648"] House Prices: Simply a Matter of Supply & Demand[/caption] Why are home prices still rising? It is a simple answer. There are more purchasers in the market right now than there are available homes for them to buy. This is an example of the theory of “supply and demand” which is defined as:
“the amount of a commodity, product, or service available and the desire of buyers for it, considered as factors regulating its price.”When demand exceeds supply, prices go up. This is currently happening in the residential real estate market. Here are the numbers for supply and demand as compared to last year for the last three months (March numbers are not yet available): [caption id="attachment_37309" align="alignnone" width="650"] Simply a Matter of Supply & Demand[/caption] In each of the last three months, demand (buyer traffic) has increased as compared to last year while supply (number of available listings) has decreased. If this situation persists, home values will continue to increase.