It seems that at least several times each week Nathan and I are discussing the housing market with our clients. Many of our clients are surprised to see record high valuations on their homes according to various real estate websites.
This actually helps people feel good about their personal financial position and net worth. This is something known as “Wealth Effect”, and it can have a positive impact on the economy, personal spending and consumption. This is due to the fact that when their assets, such as their homes and 401(k)s, have gone up in value, they feel happier and more confident. Therefore, they are willing to spend more money, driving economic growth. This can create what is known as a “positive feedback loop”.
We saw this phenomenon play out during the mid-2000’s during the last real estate bubble. This was fed by aggressive and undisciplined lending by the banking system, especially in subprime markets. It eventually led to the Great Financial Crisis of 2008. We ended up with the government bailing out the banking system, and a long period of below average economic growth as a result.
We are also having discussions with our clients on a very regular basis about the fact that their kids are having a hard time buying a house in today’s market. Most homes that go on the market are selling within 24-48 hours of listing, at or above market price. There are often multiple people bidding on these homes. So, what is going on in the real estate market today, and are we facing a situation similar to what we saw 15 years ago in the last housing bubble?
To put this in perspective, we wanted to share a couple of data points with you today. The first is a chart that compares housing prices to rent since 1975.
The second chart compares the ratio of home prices to average hourly earnings over the same time period. Both charts show that housing prices are at the highest level they have been in over 15 years. However, on a relative basis, they are not at the same territory that they were in the mid 2000’s during the house in bubble.
So, what is driving prices so much higher today? This is partly due to the Federal Reserve Bank keeping interest rates low. This allows people to buy a more expensive home while keeping a reasonable mortgage payment. This is a very intentional effort on the part of the Fed. It allows economic activity to accelerate out of the pandemic and also supports the housing market. This has led to a dramatic rise in housing prices over the last 12 months.
A large portion of this is simply due to supply and demand. In our final chart below, since statistics started being kept in the early 1980s, we have averaged approximately 2.5 million homes on the market at any given point in time. The all-time high was 3.7 million homes in 2007 at the peak of the real estate bubble. As you can see the number of homes on the market has dropped precipitously since then. There are just slightly more than 1 million homes for sale currently…by far the lowest level ever.
This is due to several reasons. First, many people felt uncomfortable selling their home or having an open house with strangers coming in during the coronavirus outbreak. People were also much less willing to sell their home during a period of economic uncertainty. Additionally, it takes approximately 1.5 million homes being built per year to keep up with population growth, new family formation, and scrappage due to voluntary knock downs, fire, floods, hurricanes, etc. Over the last 20 years, from March 2001 through February 2021, builders have averaged just over 1.2 million new homes being constructed per year. This is leading to a severe shortage in homes reflected in this chart.
What is going on in the home residential real estate market has a significant impact on our clients and their families. We wanted to bring you some information to put this in context. It does not seem like we are on the cusp of another housing bubble at the moment. Today’s issues are driven more by supply and demand than by reckless lending by the banks. However, the substantial increase in housing prices is certainly causing issues for many people.
We will continue to monitor these trends and keep you in the loop. Please feel free to share this information with friends and family that have questions about the housing market now. It may help them understand and put things in perspective, even if it does not solve their immediate issues. It is important to have this background and knowledge as we try to make wise decisions and “Move Life Forward”.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed
directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets
mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable;
however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future