Reflections on the State of the Market

Posted by Elle Seybold on Tuesday, April 7th, 2020 at 4:14pm.

Reasons to feel comfort in the real estate market during these troubling times:

  1. Housing prices

There’s a stark difference between pre-crash (2007) and today. Normal appreciation is around 3.6%, so while current appreciation is higher, 4.7%, than the long-run historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s (which was in the low teens in the years prior to the crash).

  1. Shortage of homes on the market – not a surplus

The months’ supply of inventory needed to sustain a normal real estate market is approximately six months.  More than that leads to price depreciation.  Less than that is a shortage which leads to appreciation.  Pre-crash, 2007, saw too many homes for sale – roughly 8.2 months of inventory which led to price declines.  Today, the shortage of inventory – 3.1 months – is causing an acceleration in home values.

  1. Houses became too expensive to buy

The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%.  Today, prices are still high.  Wages, however, have increased (though temporarily diminished) and the mortgage rate is about 3.5%.  That means the average family pays less of their monthly income toward their mortgage payment than they did.

 

 

 

  1. People are equity rich, not tapped out

In the run-up to the housing bubble, homeowners were using their homes as a personal ATM machine.  Many immediately withdrew their equity once it built up, and they learned their lesson in the process.  Prices have risen nicely over the last few years, leading to over 50% of homes in the country having greater than 50% equity.  But owners have not been tapping into it like the last time.  Below is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007.   Homeowners have cashed out over $500 billion dollars less than before:

 

During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home).  Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That is not the environment today.

 

The Market

From October 2007 to March 2009, the S&P 500 fell by over 50% and home values depreciated – but that was because that economic slowdown was mainly caused by a collapsing real estate market and a meltdown in the mortgage market.  This time, the stock market correction is caused by an outside event (the coronavirus) with no connection to the housing industry. 

 

Since the current situation resembles the stock market correction in the early 2000s, let’s review what happened to home values during that time.

 

Bottom Line

Don’t be concerned we’re making the same mistakes that led to the housing crash, it is a different environment today.  While no one wants to breath the word recession, we know we are in one – at least for the quarter.  With respect to real estate markets, home values increased in 3 of the last 5 U.S. recessions and decreased by less than 2% in the 4th.

 

 

 

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