A Forward Look at the US Housing Market

The housing market, and in particular the meteoric rise of home prices has been a big topic of discussion in recent months. Home prices across the country are showing record year over year price increases. With the housing market running so hot currently, many people are asking the question: “can this continue?” The data suggests that you have a confluence of four major factors here that are creating tailwinds for the housing market to continue to be a strong performing asset class for the foreseeable future. ?

1. Demographics 2. Interest Rates 3.?Housing Supply Shortage 4. The COVID Effect

1.?????The Demographic Makeup of the U.S.

Millennials catch a lot of flack for settling down later in life compared to the generations that came before them. They are going to school longer, holding more debt, and had to deal with not one, but now two crises during their early working years. However, the millennial generation is the largest percentage of the US population, and the oldest millennials have turned 40 this year. So, even despite the sluggish start, we now have the largest cohort of the American population are coming into their prime earning years, starting families, and buying homes. Millennials were going to buy houses eventually, it just took them more time to get into the financial shape to do it. Now, many have been spurred into action by the COVID pandemic to buy a home (more on that later). When broken out by the most common age groups, this demographic trend shows no signs of slowing down and looks poised to continue for the next couple decades.

2.?????Interest Rates

Interest rates are at the lowest level ever seen in the modern history of the United States. It has literally never been cheaper in the history of this country to borrow money to purchase a home. For most people simply owning your single-family home and paying off your mortgage is one of the best ways to build wealth. Lower interest rates just mean that you pay the bank less money over the life of the loan and allows more of your payment to go into the equity of the home. For example, the median sales price of houses sold in the US was $374,900 for Q2 2021[1]. The current average mortgage rate in the U.S. is 2.87%. A 1% difference in mortgage rates (2.87% vs. 3.87%) on a $374,900 home is equal to $59,773.53 in savings on interest costs over the life of the loan. These rates look poised to stay low for several years based on comments made by the Federal Reserve.

3.?????There is a massive housing shortage in the United States

The housing market in the U.S. is still showing scars from the aftermath of the financial crisis of 2007-2009. Construction of residential real estate fell off a cliff during the crisis and has been very slow to recover. This has put a squeeze on buyers looking for new homes due to a serious lack of supply. U.S. builders added 1.225 million new housing units, on average, each year from 2001 to 2020, according to a report, which was prepared for NAR by Rosen Consulting Group LLC. That figure is down from an annual average of 1.5 million new units from 1968 to 2000.[2]

From 2010-2020 the supply & demand gap for housing grew even further, with the total shortfall of housing units coming in at roughly 6.8 million units.

In order to fill the supply gap new construction is going to have to accelerate to a pace well above the current trend. It would take more than 2 million housing units per year (approximately 550,000 more than the 1.5 million historical average). Nationally, new housing starts reached a seasonally adjusted annual rate of slightly more than 1.7 million units in March 2021. This increase was a significant acceleration from prior years and marked the highest pace of housing starts since 2006. However, even if building were to continue at the current pace—the most rapid pace in more than a decade—it would still take more than 20 years to close the 5.5-million-unit housing gap.[3]

4.?????The COVID Pandemic has Spurred Demand for Homes.

COVID-19 completely transformed the way Americans view their home. Your house is no longer just the place that you live. It is your house, your office, your school, your gym, and essentially the central hub of your entire life. The work from home trend looks poised to continue in some fashion for many workers in this country. ?This has led to a premium being put on having enough space to accommodate the work from home lifestyle. Home ownership from the youngest group of prospective buyers was already creeping up over the past few years, and that trend has accelerated at a faster clip since the onset of the pandemic.

The work from home trend has amplified the supply and demand imbalance, and that has shown up in the data in the last year. We have a situation where we have a large influx of people out seeking to buy home, but the people who currently own homes are not wanting to leave for the same reasons. If you are going to sell a house in a sellers’ market, that means you also must compete against all the other buyers that have flooded the market and pay a premium price for your new home as well. This has caused the baby boomers to stay in their home and avoid downsizing for longer, further exacerbating the supply crunch in the market. This has led to record low inventories for existing homes.

This combination of demand increase and supply crunch has led to record price increases for homes in 2021.

As with any crisis. There will be winners and there will be losers. Housing is difficult to assess on a national scale due to the fragmented nature of the real estate market, and certain areas of the country will do much better than others. Based on the existing data, there are significant tailwinds that suggest that the residential housing market could be one of the best performing asset classes of the 2020s.

Disclaimer: This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading or distribution strategy. Past performance does not guarantee future results. The accuracy and completeness of this information is not guaranteed and is subject to change. Waterfront Wealth Inc. is currently registered as an investment adviser with the Securities and Exchange Commission.

[1] https://fred.stlouisfed.org/series/MSPUS

[2] https://www.wsj.com/articles/u-s-housing-market-needs-5-5-million-more-units-says-new-report-11623835800

[3] https://cdn.nar.realtor/sites/default/files/documents/Housing-is-Critical-Infrastructure-Social-and-Economic-Benefits-of-Building-More-Housing-6-15-2021.pdf