[caption id="" align="alignnone" width="648"] Are Home Values Really Overinflated[/caption] Last week, the National Association of Realtors (NAR) released their most recent Existing Home Sales Report. According to the report:
“The median existing-home price for all housing types in January was $240,500, up 5.8 percent from January 2017 ($227,300). January’s price increase marks the 71st straight month of year-over-year gains.”Seventy-one consecutive months of price increases may have some concerned that current home values may be overinflated. However, at the same time, Zillow issued a press release which revealed:
“If the housing bubble and bust had not happened, and home values had instead appreciated at a steady pace, the median home value would be higher than its current value.”Here are two graphs that help show why home prices are exactly where they should be. The first graph shows actual median home sales prices from 2000 through 2017. [caption id="attachment_37136" align="alignnone" width="650"] Are Home Values Really Overinflated[/caption] By itself, this graph could heighten concerns as it shows home values rose in the early 2000s, came tumbling down and are now headed up again. It gives the feel of a rollercoaster ride that is about to take another turn downward. However, if we also include where prices would naturally be, had there not been a boom & bust, we see a different story. The blue bars on this graph represent were prices would be if they had increased by the normal annual appreciation rate (3.6%). By adding 3.6% to the actual 2000 price and repeating that for each subsequent year, we can see that prices were overvalued during the boom, undervalued during the bust, and a little bit LOWER than where they should be right now.
Bottom LineBased on historic appreciation levels, we should be very comfortable that current home values are not overinflated.
- The Cost of Waiting to Buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
- Freddie Mac predicts interest rates to rise to 5.1% by 2019.
- CoreLogic predicts home prices to appreciate by 4.3% over the next 12 months.
- If you are ready and willing to buy your dream home, find out if you are able to!
In today’s housing market, where supply is very low and demand is very high, home values are increasing rapidly. Many experts are projecting that home values could appreciate by another 4% or more over the next twelve months. One major challenge in such a market is the bank appraisal. When prices are surging, it is difficult for appraisers to find adequate, comparable sales (similar houses in the neighborhood that recently closed) to defend the selling price when performing the appraisal for the bank. Every month in their Home Price Perception Index (HPPI), Quicken Loans measures the disparity between what a homeowner who is seeking to refinance their home believes their house is worth and what an appraiser’s evaluation of that same home is. In the latest release, the disparity was the narrowest it has been in over two years, as the gap between appraisers and homeowners was only -0.5%. This is important for homeowners to note as even a .5% difference in appraisal can mean thousands of dollars that a buyer or seller would have to come up with at closing (depending on the price of the home) The chart below illustrates the changes in home price estimates over the last two years. Bill Banfield, Executive VP of Capital Markets at Quicken Loans urges homeowners to find out how their local markets have been impacted by supply and demand:
“Appraisers and real estate professionals evaluate their local housing markets daily. Homeowners, on the other hand, may only think about their housing market when they see ‘for sale’ signs hit front yards in the spring or when they think about accessing their equity.” “With several years of growth, owners may have more equity than they realize. Many consumers use the tax season at the beginning of the year to reevaluate their entire financial life. It also provides a good opportunity for them to consider how best to take advantage of their equity while mortgage interest rates and borrowing costs are still near record lows.”
Bottom LineEvery house on the market must be sold twice; once to a prospective buyer and then to the bank (through the bank’s appraisal). With escalating prices, the second sale might be even more difficult than the first. If you are planning on entering the housing market this year, let’s get together to discuss this and any other obstacles that may arise.
[caption id="" align="alignnone" width="648"] Home Prices[/caption] As home values continue to increase at levels greater than historic norms, some are concerned that we are heading for another crash like the one we experienced ten years ago. We recently explained that the lenient lending standards of the previous decade (which created false demand) no longer exist. But what about prices? Are prices appreciating at the same rate that they were prior to the crash of 2006-2008? Let’s look at the numbers as reported by Freddie Mac:
The levels of appreciation we have experienced over the last four years aren’t anywhere near the levels that were reached in the four years prior to last decade’s crash.We must also realize that, to a degree, the current run-up in prices is the market trying to catch up after a crash that dramatically dropped prices for five years.
Bottom LinePrices are appreciating at levels greater than historic norms. However, we are not at the levels that led to the housing bubble and bust.
- The Federal Housing Finance Agency (FHFA) recently released their latest Quarterly Home Price Index report.
- In the report, home prices are compared both regionally and by state.
- Based on the latest numbers, if you plan on relocating to another state, waiting to move may end up costing you more!
[caption id="" align="alignnone" width="648"] The Cost of Waiting to Buy[/caption] We recently shared that over the course of the last 12 months, home prices have appreciated by 7.0%. Over the same amount of time, interest rates have remained historically low which has allowed many buyers to enter the market. As a seller, you will likely be most concerned about ‘short-term price’ – where home values are headed over the next six months. As a buyer, however, you must not be concerned about price, but instead about the ‘long-term cost’ of the home. The Mortgage Bankers Association (MBA), Freddie Mac, and Fannie Mae all project that mortgage interest rates will increase by this time next year. According to CoreLogic’s most recent Home Price Index Report, home prices will appreciate by 4.7% over the next 12 months.
What Does This Mean as a Buyer?If home prices appreciate by 4.7% over the next twelve months as predicted by CoreLogic, here is a simple demonstration of the impact that an increase in interest rate would have on the mortgage payment of a home selling for approximately $250,000 today: [caption id="attachment_36718" align="alignnone" width="650"] The Cost of Waiting[/caption]
Bottom LineIf buying a home is in your plan for 2018, doing it sooner rather than later could save you thousands of dollars over the terms of your loan.
[caption id="" align="alignnone" width="648"] Home Prices Up 7% from Last Year[/caption] According to CoreLogic’s latest Home Price Index, national home prices have appreciated by 7.0% from October 2016 to October 2017. This marks the second month in a row with a 7.0% year-over-year increase. A lack of supply of homes for sale has led to upward pressure on home prices across the country, especially in areas where both existing and new home inventory have not kept up with buyer demand. CoreLogic’s Chief Economist Frank Nothaft elaborated on the significance of such a large year-over-year gain,
“Single-family residential sales and prices continued to heat up in October. On a year-over-year basis, home prices grew in excess of 6 percent for four consecutive months ending in October, the longest such streak since June 2014. This escalation in home prices reflects both the acute lack of supply and the strengthening economy.”This is great news for homeowners who have gained over $13,000 in equity in their home over the last year! Those homeowners who had been on the fence as to whether or not to sell will be pleasantly surprised to find out that they now have an even larger profit to help cover a down payment on their dream home. CoreLogic’s President & CEO Frank Martell had this to say,
“The acceleration in home prices is good news for both homeowners and the economy because it leads to higher home equity balances that support consumer spending and is a cushion against mortgage risk. However, for entry-level renters and first-time homebuyers, it leads to tougher affordability challenges.”Any time the price of a home goes up there will likely be concern about the affordability of that home, but there is good news. Mortgage interest rates remain at historic lows, allowing buyers to enter the housing market and lock in a low monthly housing cost.
Rents Are Also RisingThe report went on to mention that over the same 12-month period, median rental prices for a single-family home have also risen by 4.2%. With rents and home prices rising at the same time, first-time buyers may find the task of saving for a down payment a little daunting. Low down payment programs are available and have been a very popular option for first-time buyers. The median down payment for first-time buyers in 2017 was only 5%!
Bottom LineIf you are looking to enter the housing market, as either a buyer or a seller, let’s get together to go over exactly what’s going on in our neighborhood and discuss your options!
Home Prices are Increasing!There are many unsubstantiated theories as to why home prices are increasing. 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 1). According to the Existing Home Sales Report from the National Association of Realtors (NAR), the monthly inventory of homes has been below six months for the last four years (see chart 2).
Bottom LineIf buyer demand outpaces 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.
With residential home prices continuing to appreciate at levels above historic norms, some are questioning if we are heading toward another housing bubble (and subsequent burst) like the one we experienced in 2006-2008. Recently, five housing experts weighed in on the question.
Rick Sharga, Executive VP at Ten-X:
“We’re definitely not in a bubble.” “We have a handful of markets that are frothy and probably have hit an affordability wall of sorts but…while prices nominally have surpassed the 2006 peak, we’re not talking about 2006 dollars.”
Christopher Thornberg, Partner at Beacon Economics:
“There is no direct or indirect sign of any kind of bubble.” “Steady as she goes. Prices continue to rise. Sales roughly flat.…Overall this market is in an almost boring place.”
Bill McBride, Calculated Risk:
“I wouldn’t call house prices a bubble.” “So prices may be a little overvalued, but there is little speculation and I don’t expect house prices to decline nationally like during the bust.”
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices:
“Housing is not repeating the bubble period of 2000-2006.” “…price increases vary unlike the earlier period when rising prices were almost universal; the number of homes sold annually is 20% less today than in the earlier period and the months’ supply is declining, not surging.”
Bing Bai & Edward Golding, Urban Institute:
“We are not in a bubble and nowhere near the situation preceding the 2008 housing crisis.” “Despite recent increases, house prices remain affordable by historical standards, suggesting that home prices are tracking a broader economic expansion.”
Multigenerational homesare coming back in a big way! In the 1950s, about 21%, or 32.2 million Americans shared a roof with their grown children or parents. According to an article by Realtor.com, “Nearly 1 in 5 Americans is now living in a multigenerational household – a household with two or more adult generations, or grandparents living with grandchildren – a level that hasn’t been seen in the U.S. since 1950.” Another report that proves this point is the National Association of Realtors’ (NAR) 2017 Profile of Home Buyers and Sellers which states that 13% of home buyers purchased multigenerational homes last year. The top 3 reasons for purchasing this type of home were:
- To take care of aging parents (22%, up from 19% last year)
- Cost savings (17%)
- Children over the age of 18 moving back home (16%, up from 14% last year)
“Everyone is looking for the perfect home for any number of family situations, such as families who opt to take care of aging parents or grandparents at home, or millennials looking to live with their parents while they attend school or save for a down payment.”For a long time, nuclear families (a couple and their dependent children) became the accepted norm, but John Graham, co-author of “Together Again: A Creative Guide to Successful Multigenerational Living,” says, “We’re getting back to the way human beings have always lived in – extended families.” This shift can be attributed to several social changes over the decades. Growing racial and ethnic diversity in the U.S. population helps explain some of the rise in multigenerational living; “Data suggest that multigenerational living is more prevalent among Asian (28%), Hispanic (25%), and African-American (25%) families, while U.S. whites have fewer multigenerational homes (15%).” Additionally, women are a bit more likely to live in multigenerational conditions than are their male counterparts (12% vs. 10%, respectively). Last but not least, basic economics. Valerie Sheets brings to light the fact that home prices have been skyrocketing in recent years. She says that, “As home prices increase, more families tend to opt for living together.”