Is The Housing Market Overheating?

There is a lot of talk of the housing market showing signs of overheating……Yes and no.

You may be wondering how the answer is both? Truth be told, in any market, there are both signs of bull and bear markets …. and housing is no different. ??

Headline numbers for one sector is not always indicative of all sectors.??In housing we have both a New Home Sales and Existing Home Sales. ?Each with its own variables and pressure points.

Another reason we don’t have a clear answer is that some of the headlines are misleading.??Case in point are the unemployment numbers and the jobs numbers.??Yes, we are creating more jobs than not, but we are still catching up to all those job losses we experienced at the beginning of the pandemic. ?Yes, unemployment appears to be going down, but a large portion of the population has stopped looking for work.?Those not looking for work are not factored in and, therefore, a huge swath of the population is misclassified in the headline unemployment number.??Pandemic Unemployment Assistance Claims and Pandemic Emergency Claims are not calculated with the unemployment numbers which skews the unemployed percentages. ??Essentially those that are not able to work due to the pandemic are not counted.?Unemployment is lingering around 7% because of this. ??So, as you can see, headline data on it is face is not the whole story.

So, let’s dig into the housing market and see what is going on?!

First off, the US is currently reeling from a 5.5 million home shortage due to the anemic new homes built for the previous decade. ??In-order for the builders to overcome that shortfall, they would need to more than quadruple their annual average units built. Yes, quadruple.?This is not something the builders can do.

Due to the housing shortage over the last decade, home prices continue to climb.?

But wait…didn’t we just see that it was just announced that New home sales were down 6.6% and median home price was reported at 362k.?This is down 5% from the previous report but still UP 6% year over year.

What you’re not hearing from the analysts is that 77% of the new home sales in June, were for homes not started or under construction and 90% of the current inventory at the end of June were also not started or still under construction homes. ??Obviously seeing the stats like this you can see there is a huge backlog of construction for builders. The other thing they don’t mention in these reports is the news that the Nation’s largest builder, DR Horton, is pulling back on sales to let supply catch up to demand.

Demand is at an all- time high… if you look at the demographics of the United States, the 28 to 35 year old people make up the largest percentage of the US overall population. This generation of individuals are in their prime household formation years. Getting married, having kids, landing career jobs, and buying homes.

Home sales seem to be down not because of a lack of a demand but simply because the builders are unable to keep up and many are still looking for a solution to the shortage as many industries are across the US. This is not a matter of overheating but a matter of losing steam because they can’t keep up with demand.??I would argue the housing shortage will continue to drive up prices and, yes, we may see a slow-down in appreciation as we come on the colder months and as families start to be priced out of the market. If there is any cool down in sight, it is not because of a huge flood of inventory, but not enough affordable housing to meet the demand.??

Lower priced homes have the fiercest competition right now and until we are able to find a way to build more affordable entry level housing in markets across the US will continue to see a strong housing market. Many of us in the Mortgage industry are calling for the Government to assist in subsidizing builders and incentivizing them to build smaller more affordable homes.??Maybe bringing back the Condo craze to make them more affordable.?In my opinion handing out money for a down payment is not a cure but will only exacerbate the problem. Those who are waiting on that down-payment grant and/ or the market to crash, you will be waiting a long time. ?Unfortunately, waiting may cause you to not own a home at all. Remember just because a market goes up quickly doesn’t mean it will come down rapidly or crash.

The 2007/2008 Great Recession was totally different. We were offering mortgages for hundreds of thousands of dollars and handing them out to anyone that could fog a mirror and sign their name. This practice coupled with ARM and Negative Amortization mortgages caused a flood of inventory.?These poor people that were caught up unknowingly, in this frenzy, had to sell their home under duress and some just walked away.?Why, because they couldn’t afford their mortgage and many of them couldn’t refinance because they never really qualified for the mortgage in the beginning.?This resulted in an inventory of over 3 million homes deluging the market.

The current housing market inventory is a third of that right now. Many believe we will see a rise in Foreclosures because of the pandemic and forbearance agreements. ?However, what we are seeing is that many of those in forbearance have never skipped a payment. Many of those who did skip a payment have been able to make up the payments, as well, the lenders are working out modifications and helping those homeowners struggling in order to keep them in the homes and paying their mortgage.

Looking for a unicorn…..

Unless we find a magical way for the US to achieve 2+million homes of inventory in a short amount of time, in my opinion, there is not a slowing down or an overheating of the housing market. ??Remember the media likes a juicy headline for viewers.?In truth, reading through many of them you will see there is not that much evidence and a lot of other reasons why the headline is misleading.

Sources:? #HousingMarket

Sales of New Homes US NEWS

Business Insider - Underbuilding in last decade