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There are many unsubstantiated theories as to why home values are continuing to increase. 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).
If 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.
There is a lot of discussion about the current state of housing affordability for both first-time and move-up buyers, and much of the narrative is tarnished with a negative slant. However, the truth is that housing affordability is better today than at almost any time in our history.
The naysayers are correct in the fact that affordability today is not as good as it has been over the last several years. But, we must remember that home prices collapsed during the housing crash, and distressed properties (foreclosures and short sales) kept home values depressed for years. When we compare affordability to the decades that proceeded the crash, a different story is revealed.
Here is a graph of the National Association of Realtors’ Housing Affordability Index. The higher the graph, the more affordable homes are.
We can see that affordability is better today than in the fifteen years prior to the boom and bust.
It reveals that, though a ‘typical’ housing payment was less expensive in 2012 (remember distressed properties), it is currently less expensive than it was in 2000 and is still projected to be lower next year than it was in 2000.
Mark Fleming, Chief Economist at First American, explained it best:
“While borrowing power for the potential home buyer has fallen relative to the low point of 2012, it remains high today and will remain high next year, relative to the long run average. If you don’t want to rent anymore and are considering becoming a homeowner, even if mortgage rates rise next year, your borrowing power will remain strong by historic standards.”
According to Freddie Mac’s latest Primary Mortgage Market Survey, interest rates for a 30-year fixed rate mortgage are currently at 3.92%, which is still near record lows in comparison to recent history!
The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power.
Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford will decrease if you plan to stay within a certain monthly housing budget.
The chart below shows what impact rising interest rates would have if you planned to purchase a home within the national median price range, and planned to keep your principal and interest payments between $1,850-$1,900 a month.
With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000). Experts predict that mortgage rates will be closer to 5% by this time next year.
Act now to get the most house for your hard-earned money.
Owning a home has great financial benefits, yet many continue to rent! Today, let’s look at the financial reasons why owning a home of your own has been a part of the American Dream for as long as America has existed.
“In reality, buying or renting a home is an intensely personal decision, with emotional and even financial considerations that go beyond whether to invest in this one (admittedly large) asset. Looking strictly at housing market numbers, there is a concrete point at which buying a home makes more financial sense than renting it.”
What proof exists that owning is financially better than renting?
Homeownership allows you to lock in your monthly housing cost.
Buying a home is cheaper than renting.
No other investment lets you live inside of it.
2. Studies have shown that a homeowner’s net worth is 44x greater than that of a renter.
3. Just a few months ago, we explained that a family that purchased an average-priced home at the beginning of 2017 could build more than $48,000 in family wealth over the next five years.
4. Some argue that renting eliminates the cost of taxes and home repairs, but every potential renter must realize that all the expenses the landlord incurs are already baked into the rent payment– along with a profit margin!!
Owning a home has always been, and will always be, better from a financial standpoint than renting.
The inventory of existing homes for sale has dropped year-over-year for the last 29 consecutive months and is now at a 3.9-month supply.
Existing home sales are currently at an annual pace of 5.48 million, the highest pace since June of this year, but down 0.9% from October 2016.
NAR’s Chief Economist, Lawrence Yun, had this to say: “While the housing market gained a little more momentum last month, sales are still below year ago levels because low inventory is limiting choices for prospective buyers and keeping price growth elevated.”