It has been an unprecedented year, and many people are wondering when things will return to normal. While we’ve been wearing masks and socially distancing, we’ve also been experiencing the fastest growing real estate market seen in decades. Is this the new normal?
Home values in the U.S. have increased by 17% to a median home price of $329,000. We all saw how it turned out in 2008. Problems began when lending companies issued subprime variable loans above home values. This caused interest rates to rise and, in 2007, forced many into foreclosure. Businesses laid off workers to conserve money. Unemployment caused more foreclosures. As foreclosures increased and prices fell, panic ensued, and many raced to sell their homes and pay off their debts.
Since 2008 a few things have changed. The U.S. population has increased by approximately 25 million, and the median age has increased from 36 to 38 meaning there are more of us and more of us are old enough to have jobs. This equates to a shrinking household size, which is to say our kids are all grown up and need a place of their own.
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Millennials are now buying homes and starting families. Thus we are seeing more of the population at the age of “household formation” as Millennials enter the market. By some estimates, there are 31 million more Millennials than there are Gen Xers.
Baby Boomers are also having an impact on the housing market as 10,000 Boomers turn 65 years old every day and will continue to for the remainder of the decade. Boomers are the second fastest-growing population in history, renting and residing in owner-occupied dwellings. Generation X hasn’t been forgotten but encompasses a lower percentage as Millennials outnumber them as the fastest-growing population entering the housing market.
Housing units in the U.S. grew from approximately 130.6 million in 2008 to 140.8 million currently, but as a percentage had no growth. In 2008, this would be equal to 2.4 people per house. Although the total number of housing units has grown over the past 13 years, the average household size of 2.4 people has remained the same. We’re at an impasse — like an overfilled bag bursting at the seams — where there are too many people and too few places for them to go. There are a lot of potential house hunters who have been living at home useful site or renting with roommates over the last several years who are now jumping into the housing market.
According to Federal Reserve Economic Data, in 2006, the country was building between 1.5 to 2 million new homes each month. From 2015-2020, the U.S. was building at a rate of nearly 50% of 2008, at about 1 million new homes per month. On an annual basis, that is 14 million fewer homes per year, while simultaneously, a larger Millennial population was working its way through college and into the job market.
According to data from Trading Economics, existing home sales in 2005 were nearly 7 million per month while numbers from 2015 to 2020 averaged about 5.5 million. Multifamily rentals were built to help absorb the need for housing, but they too filled up fast. Currently, the rental market is seeing some of the lowest vacancy rates in the last decade.
Like a game of musical chairs, existing home sales are misleading as there are homes being sold from one group to another — they aren’t necessarily a sign of a new supply of homes on the market. Less new construction and low vacancy rates leave those who have sold their homes searching for new housing for longer periods — in 2005 there was approximately 4 months worth of sales inventory available at any given month and now we’re at about 2.1 months as of March 2021.
The housing inventory just doesn’t exist. We’ve been able to avoid drastic price increases due to Generation X being smaller than the preceding generation and the Millennials’ delay in household formation. Covid caused us all to hunker down indoors, but Millennials still need homes of their own as we recover.
Rising debt is of course always a factor, and while the FED has said they will keep interest rates low, the household portion of disposable income that is contributable to home mortgages has dropped since 2008. In 2007, it was 13% and now it is 9.4%. This means that if real estate prices do drop, homeowners will be more prepared to avoid foreclosure with their income and savings.
Fixed interest rates now make up a larger portion of the mortgage market as rates have dropped so low and are thus crowding out variable interest rates. In 2008, adjustable-rate mortgages (ARMs) made up over 50% of all mortgages, but now they represent less than 10%. This too helps homeowners from being impacted by bigger market shocks as they were in 2008 when defaulting banks pushed interest rates higher.
When equity grew for the homeowner in the 2000’s, many took out a HELOC, which maximized the equity in their homes. Currently, households haven’t tapped into their newfound equity. Home loans are at the same dollar value they were in 2008, while median home prices have increased by over $100,000.
So what does all this mean in terms of when the next housing bubble will burst? It means the recent sharp price increases aren’t due to low-interest rates or predator mortgage gimmicks such as during the lead-up to the 2008 recession. They are caused by a lack of supply. There just aren’t enough homes for all the new working people entering the market. Until we have an overabundance of new homes available for those wanting a house, we’ll continue to see pressure on home prices and rents. In the long run, it could take five to 10 years for the housing supply to increase enough to meet the current need.