Housing bubble? What bubble?
By Capital Thinking • Issue #871 • View online
Booms and bust have always been frequent in real estate.My Spidey senses are tingling again, however it isn’t obvious why this time - or what the outcome will be.-
The Housing Conundrum | Calculated Risk:
In general, demographics are very favorable for home buying. In Housing and Demographics: The Next Big Shift, I presented these graphs:
This graph shows the longer term trend for three key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap).
This graph is from 1990 to 2060 (all data from BLS: current to 2060 is projected).
We can see the surge in the 20 to 29 age group last decade (red). Once this group exceeded the peak in earlier periods, there was an increase in apartment construction. This age group peaked in 2018 / 2019 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak around 2023.
For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior). The population in this age group is increasing, and will increase further over this decade.
The current demographics are now very favorable for home buying - and will remain positive for most of the decade.
And on the supply side for demographics:
The next big housing shift will be when the Baby Boom generation starts to downsize and move to retirement communities. No cohort is monolithic - some people will age-in-place until they pass away, others will move in with family (or family will move in with their parents), and some will move to retirement communities.
There is no magic age that people reach and start to transition, but looking at prior generations, it seems to start when people are around 80 years old.
The leading edge of the Baby Boom generation is currently 75 (born in 1946), and these people will be turning 80 in 2026.
The peak of the boomers will be turning 80 in 2035 or so, and the tail end turning 80 in 2044 (born in 1964).
My sense is there will be a pickup in Boomers selling their homes in the 2nd half of the 2020s and lasting until 2040 or so.
However, we also have to note that demographics have been dismal recently. Housing economist Tom Lawler send me a note yesterday that was a follow-up to his previous email Lawler: Update on the Dismal Demographics of 2020; “Smallest Population increase since 1918”
Provisional data from the CDC suggest that from April 1 of last year to April 1 of this year the so-called “natural” increase in the US population was barely positive. Provisional data show US births over the 12 month period ending March 2021 at 3.565 million, and US deaths over that period at 3.521 million.
Another positive for the housing market is the near record low mortgage rates.
This graph from MortgageNewsDaily shows the 30 year mortgage rate since 1971.
Currently 30 year rates are around 3.25%, up from around 2.75% last year, but still near record lows.
And lending standards have been fairly solid, although there has been some loosening in recent years - like increases in allowable DTI (debt-to-income ratio). Delinquencies are low (not counting loans in forbearance due to the pandemic).
And we haven’t seen a huge increase in equity extraction, meaning that most homeowners have substantial equity in their homes (so even if prices decline, there won’t be cascading price declines).
And housing inventory is near record lows. In Some thoughts on Housing Inventory, I outlined some of the reasons why inventory is so low.
With solid demographics, low mortgage rates, and record low inventory, it is no surprise that house prices are increasing rapidly.
This graph below shows existing home months-of-supply (inverted, from the NAR) vs. the seasonally adjusted month-to-month price change in the Case-Shiller National Index (both since January 1999 through March 2021).
There is a clear relationship, and this is no surprise (but interesting to graph). If months-of-supply is high, prices decline. If months-of-supply is very low (like now), prices rise quickly.
In March, the months-of-supply was at 2.1 months, and the Case-Shiller National Index (SA) increased 1.5% month-over-month (a month-over-month record). The black arrow points to the March dot.
In the April existing home sales report released last month, the NAR reported months-of-supply increased to 2.4 month in April. There is a seasonal pattern to inventory, but this is still very low - and prices are increasing sharply.
So why the concern?
The recent price increases make sense from a supply and demand perspective, but prices do seem too high. And I suppose the frenzy is bothering me.