Housing Prices – will you be able to buy a home in your own city?

In my previous two posts in my series Housing – the next Phase, I outlined why we have pent-up demand and a lack of supply – existing and new homes. We have read over and over again about the housing bubble. The bubble was NOT created by the housing industry but reacted to the financing of homes with no money down and everyone can own a home policy.

The industry readjusted with foreclosures and families staying in their homes longer. However, home prices have escalated quickly since mid-2013. Prices will continue to rise while higher interest rates and inflation will diminish your buying power in 2015.

The most significant problem is our economic “recovery” has taken too long and the level of recovery has been tepid. Our economy is hinging on another recession and it will take only one major event to cause a quick and unrelenting spiral downward.

Since 2010, I have been predicting a rapid rise in housing prices because that is the pattern after every recession for the following reasons:

Housing shortage  – Please read my post on supply. We will continue to have a housing shortage simply because the ability to produce new homes is not in-place.

Interest rates increase by year end - I thought interest rates would be on the rise but the unprecedented action by the Fed is keeping interest rates low.

Ask yourself these questions:

If interest rates increase, what will happen to the housing recovery?

Interest rates have always been used by the Fed to regulate inflation – now what?

Material shortages i.e. concrete, sheetrock, lumber, etc. - Every recession causes material shortages simply because manufacturers shut down plants and decrease production because demand is reduced. Shortages bring higher costs.

Labor shortages  -The loss of the construction labor force is staggering. Every sector of the industry has suffered a retraction as many in the field have left the industry in droves. The labor force will not come back without a sustained economic recovery. 

Average Price of Homes SOLD – Decade by Decade Review

Source: www.census.gov

                                                              

                             Average Price          

1970                             $27,300

                                                             272% Appreciation - decade resetting our economy

1980                             $74,400

1990                             $149,500

2000                             $202,900

To Peak 1/2007                                     $322,100

To Low 1/2009                                       $257,000

2013                                                     $326,200       2000-2013, avg. price increased 60.7%.

WOW ……….. What happened during the ‘70’s to realize such a large appreciation in the average price of homes?

 

The jump in homeownership participation rate in the 1990’s was phenomenal. Did you ever realize that it was a direct result of Clinton’s policies?

HUD News release 97-107 June 23, 1997 in part....... "The Urban Homestead initiative is part of the National Homeownership Strategy launched by President Clinton in 1995. The strategy brings all levels of government, the housing industry, lenders and non-profit groups together to increase the national homeownership rate to an all-time high of 67.5 percent by the year 2000. Sixty-two national groups joined HUD to form the National Partners in Homeownership."

"Over the last two years the strategy has helped create 2.5 million new homeowners, while the nation's homeownership rate has grown to 65.4 percent -- the highest annual rate since 1980. Currently, a record 66.3 million American families are homeowners. The number of American homeowners has grown by 4.7 million since President Clinton took office."

However, review the graph again and notice how the average price of homes has skyrocketed since 2012 while the home ownership participation rate has spiraled downward.

Who owns the homes?

Oct 24, 2013

Families Blocked by Investors From Buying U.S. Homes

By Kathleen M. Howley Bloomberg

Wall Street’s influence on the residential real estate market is growing as the biggest investors, Blackstone Group LP (BX) and American Homes 4 Rent (AMH), have together bought about 60,000 homes across the country to benefit from low prices and rental demand from millions of former home owners who have lost properties through foreclosures.

May 8, 2014

RealtyTrac® (www.realtytrac.com), the nation’s leading source for comprehensive housing data, today released its Q1 2014 U.S. Institutional Investor & Cash Sales Report, The report shows 42.7 percent of all U.S. residential property sales in the first quarter were all-cash purchase.

This is important to know that Wall Street is again affecting housing and fueled by federal policies. Single family homes are being turned into rentals which will impact the supply causing home prices to rise even further.

Rents on single family homes will also continue to rise as well until the institutional investor decides it is time to sell their portfolio of homes. Investors are skewing the housing cycle and the vicious cycle will continue. 

July 21 2010, President Obama signed the Dodd-Frank Wall Street Reform Act into law.

The Dodd-Frank Act spans 2,300 pages and directs federal regulators to burden job creators and the economy with more than 400 new rules and mandates.

Dodd-Frank Act regulations started to be implemented in mid-2011 and continue to affect the real estate industry. My guess is that Dodd-Frank regulations have an “intended” consequence causing investors to enter the housing market at record levels. 

If you stay in your home and didn’t sell your house, you are better off today than 10-years ago. I am not suggesting that we all need to live in our homes for 10+ years to realize a gain but we do need to stop looking at buying a house as a pure investment – however you should buy a home because:

1. It is a hedge against inflation

2. It is an investment in your community

3. It is the foundation for your family

4. It is like the weather, wait and the price will change over time

5. It teaches us to slow down and mobility is not the answer anymore

6. It is a savings account

7. It is a memory scrapbook

 

The length of time we have stayed in our homes is getting back to 7-years+. This has been the standard for decades – except during the housing bubble when the time was reduced to 4-years. Greed trumped reason causing the bubble.

By reviewing this graph, you will note that before the great recession, housing affordability has been trending up. From ’07 – ’11 shows a dramatic increase in housing affordability primarily based on the dramatic decrease in housing prices, ample supply and historic low interest rates. Not so much anymore.

Another measure of the housing industry health is the Housing Opportunity Index. The following chart shows the year after the official end of each recession since 1992.

  HOUSING OPPORTUNITY INDEX - I-YEAR AFTER EACH RECESSION

		National		INTEREST RATES
Year/	HOI	Median	Weighted
Quarter	(%)	Price	Interest	Fixed
		( $000's)	Rate
1992
I	53.9	$105	8.75	8.73
II	55.5	$105	8.42	8.87
III	57.5	$110	7.93	8.30
IV	60.0	$114	7.76	8.22
2002
I	64.8	$160	6.86	7.03
Annual	63.7	$164	6.54	6.73
2010
I	72.2	$175	5.12	5.12
II	72.3	$179	5.11	5.11
III	72.1	$180	4.79	4.79
IV	73.9	$175	4.59	4.59
2014
I	65.5	$195	4.57	4.57
Source: Core Logic, HUD & Federal Housing Finance Agency.
Analyzed by NAHB Economics & Housing Policy Group

 

I have highlighted the year AFTER the great recession compared to 4-years later.

Housing Opportunity Index is lower

National Median Housing Price is higher

Mortgage Interest Rates are lower

HOUSING NEXT PHASE:

Today, buyers in the market to buy a home are chasing a limited number of homes. They have to make concessions and multiple offers are driving prices higher. What haven’t changed are interest rates which have remained historically low. It is not a matter of "if" but "when" interest rates start to move higher and when that occurs, housing will shut down - again! As a result, we will be experiencing a Jimmy Carter housing market.

Housing will remain unaffordable because interest rates will rise back to a normal historical level and buyers will not be able to afford a home since home appreciation will outpace salary advances and job growth.

Housing prices will adjust downward but not as drastic as we witnessed leading up to the great recession. Mortgage interest rates will rise. 
Pent-up demand and supply of homes will continue to be a problem.  

Soon, we will be asking "Where will our children live"?