Comparing today’s housing market to the past and discussing if we are in another bubble, Baby Boomers and the inventory shortage, the NY Fed on the economy, building wealth and much more!
Today’s Housing Market: Deja Moo?
I know it might feel like today’s housing market is experiencing deja moo as it could look like we are in another housing bubble like way back in 2006. Actually, things are MUCH different today!
Let’s look at the 4 reasons why we are not in a housing bubble:
Home prices in many areas have recovered or even exceed where they were back in 2006. But if you look at home prices compared to inflation, they should be much higher!
Frank Nothaft, Chief Economist for CoreLogic, recently said:
Even though CoreLogic’s national home price index got to the same level it was at the prior peak in April of 2006, once you account for inflation over the ensuing 11.5 years, values are still about 18% below where they were.
I know many will find this hard to believe. But facts are facts…
Getting a mortgage is nothing like it was before the housing market crashed. Don’t let that scare you because IF you are credit worthy, you can get a mortgage.
It just requires more paperwork and documentation today.
And there is proof that mortgage lending is not too loose in the Urban Institute Housing Finance Policy Center Housing Credit Availability Index (HCAI). Check out this graph using data from the Urban Institute’s HCAI:
As you can see, mortgage standards are tighter today than in the past AND the risky mortgages of the past simply do not exist anymore!
This does NOT mean that you should spend 100% of what a lender is willing to loan you! It just means the lenders are not approving anyone that can fog a mirror and the risky loans that lead to more foreclosures do not exist any more.
Mortgage Debt Level
Before the housing market crashed, lots of people were using their home’s equity as an ATM. This isn’t very smart because you can become burdened by too much debt or upside down IF home prices decrease.
The good news is that this is not happening today like it did before the housing market crashed. At least that is true according to the Federal Reserve Board’s household Debt Service Ratio for mortgages. This measures mortgage debt as a percentage of disposable personal income.
Before the housing market crashed, 7% of disposable personal income was being spent on mortgage payments. But today, households are spending only 4.48%. This is the lowest level in 38 years!
One of my least favorite buzz words for measuring the housing market is affordability. What is truly affordable for one person is very different than for someone else.
But it is a good way to track how many people should be able to afford to buy a home based on median incomes and home prices. If we look at NAR’s Housing Affordability Index, homes are very affordable today!
The chart shows us that the only time that homes were more affordable was after the housing market crashed back in 2008. Which was a great time to buy a home but hindsight is always 20/20!
You will also notice that affordability has been decreasing since the housing market crashed. In other words, the longer someone waits, the less “affordable” it may be!
Today’s housing market is nothing like it was in 2006. There are still risks and challenges today but that has always been true.
If you think that we are seeing a housing bubble today, these indicators are screaming a big fat NO!
Congress Approval Rating Only 17% in May
According to Gallup, only 17% of Americans in May approve of the job Congress is doing. This is slightly lower than the 18% rating in April.
But how many incumbents will be re-elected?
And how many of those polled will vote in the next election?
Are Baby Boomers the Key to the Housing Market Shortage?
From First American:
Baby boomers – those born between 1946 and 1964 – have steered economic trends for decades and have the highest rate of homeownership in the country, approximately 80 percent. Now, as the oldest members of the generation edge into their 70s, they are deciding to stay in their homes. According to a Realtor.com housing shortage survey, boomers have the least interest in selling their home. Approximately 85 percent of baby boomers surveyed indicated they are not planning to sell their home in the next year. The main reason, according to the survey, is that their current home meets the needs of their family.
In 2017, there were approximately 36 million baby boomer homeowner households in the United States, which is 6 percent more than in 2000. As a point of reference, the silent generation had 24 million homeowner households when they were the age of the oldest baby boomer. That’s a difference of 12 million homeowner households. With baby boomers living longer and staying in their homes, and the housing market facing a housing shortage, the need for new construction is more important than ever.
I hope no one takes this as trying to blame the Baby Boomers for the current shortage of homes for sale. If someone has lived in their home for many years, it is very understandable that they do not want to move.
Aging in place is a growing trend and we need to see more new affordable homes being built. The cost of land and over regulation make it hard for a home builder to make a decent profit in some areas of the country.
Thankfully, we are seeing plenty of affordable new homes being built in Upstate South Carolina!
Aging in Place on the Rise as a Reason to Remodel
From Eye On Housing:
According to a recent NAHB survey, “desire for better/newer amenities” and “need to repair/replace old components” once again ranked as the top reasons owners remodel their homes. However, several other reasons to remodel are gaining ground, particularly the desire to be able to age in place.
For “desire/need for more space” the climb has been gradual, with a 4-5 share that increased from 60 percent in 2012 to 66 percent in 2018. For “want to avoid moving/buying another homes” the climb has been steeper, increasing from 45 to 58 percent over the same span. The strongest and most consistent growth, however, was been in “desire to be able to age in place,” with a 4-5 share that has increased systematically from 32 percent in 2012 to 52 percent currently, with a particularly abrupt 10-point jump between 2017 and 2018.
An increased desire to avoid moving to another residence could in part be a response to higher construction costs for new homes and a low inventory of existing homes available on the market. The uptick in aging in place is not entirely surprising, given the ongoing growth in the nation’s older population.
Almost like magic how this article came to my attention right after the previous one. I would expect we can see more Baby Boomers remodeling so they can age in place.
The Economy in a Snapshot
Highlights from the NY Fed’s May 2018 Snapshot:
Housing indicators point to continued gradual improvement in this sector. Tight housing supply and a strong labor market have the potential to provide continuing support to the housing sector.
Payroll growth was solid in April after a rather moderate rise in March. The unemployment rate fell below 4%, while both the employment-to-population ratio and the labor force participation rate declined slightly in the month. The latest readings of various measures of labor compensation continued to point to modest firming.
Core PCE inflation rose to a level roughly consistent with the FOMC’s longer-run objective.
This is just a sliver of what the NY Fed shared and you should check it out. Remember, we need to keep an eye on the sentiment of the Fed to get an indication of what they may do with interest rates.
New Commissioner Says FTC Should Get Tough on Companies
Declaring that “the credibility of law enforcement and regulatory agencies has been undermined by the real or perceived lax treatment of repeat offenders,” newly installed Democratic Federal Trade Commissioner Rohit Chopra is calling for much more serious penalties for repeat corporate offenders.
“FTC orders are not suggestions,” he wrote in his first official statement, which was released today.
Many giant companies, including Facebook and Google, are under FTC consent orders for various alleged transgressions (such as, in Facebook’s case, not keeping its promises to protect the privacy of its users’ data).
I guess Chopra isn’t planning on staying at this job too long since he is making powerful enemies with his first official statement. But he certainly has my respect for saying this…
He will get even MORE of my respect if he actually holds big companies responsible for violating FTC consent orders. And for imposing mega fines on real estate agents that violate the Can-Spam Act for spamming me with new listing emails.
You Knew I Was a Rattle Snake
At a Rethinking Economics conference in Oslo last month I pointed out that western politicians and economists are repeating policy errors of the 1930s. The pattern of a global financial crash, followed by austerity in Europe and the UK, led in those years to the rise of populism, authoritarianism and ultimately fascism. The scale of economic and political failures and missteps led in turn to a catastrophic world war.
I boldly asserted that bankers (meaning the private finance sector) can be blamed for the Great Financial Crisis and for the economic policies implemented after the crisis. After all, it was bankers (backed by mainstream economists) that lobbied most successfully (both in the UK, the US and the EU) for laissez faire in the 1960s and ‘70s: the deregulation of credit creation, and for the lifting of controls over interest rates and for cross-border capital mobility. (Duncan Needham, 2014). By bribing and intimidating the political class, most notably in the US, financiers achieved, and still enjoy, self-regulating, global markets in finance.
There is plenty of blame to go around and the majority of it should go to the banks. But…
I heard a story long ago and even saw a version of it in a movie back in the 90’s. Check it out:
Long ago, an old woman went out to pick up firewood in the early Spring. She picked up what she thought was a small branch to use as kindling.
But this “branch” was actually a rattle snake that had almost frozen solid due to being caught in an early Spring snowstorm. She didn’t discover her mistake until she was back at home in her cabin.
She took pity on the snake and nursed it back to health. Eventually, the weather was warm and the snake was 100% healthy, so she decided to let it go.
As she sat it down on the ground outside of her cabin, the rattle snake bit her. She asked why did you bite me?
The rattle snake replied: “Stupid! You knew I was a rattle snake”.
So should the old lady blame the rattle snake for being a rattle snake?
Can we blame the banks for being banks? I say we are to blame for electing politicians that can be bought by the banks…
I say we are to blame for re-electing politicians that are unwilling to change stuff that leads to the economy imploding.
Think about that article earlier about Congress having a 17% approval rating. Who is to blame for that?
You might say that you voted in the last election BUT did you offer a ride to everyone you know? Did you make sure all your friends, family and co-workers were registered to vote?
Are you actually informed about all the issues because you get your news from a variety of sources and are willing to listen to different opinions with an open mind? Do you listen to understand or to respond?
There is much more to being politically active than posting BS memes and outright lies on social media. Insulting the other side accomplishes nothing IF you actually want things to get better.
America’s Worst Long Term Challenge
From Sovereign Man:
On October 22, 1981, the national debt in the United States crossed the $1 trillion threshold for the first time in history.
It took nearly two centuries to reach that unfortunate milestone.
And over that time the country had been through a revolution, civil war, two world wars, the Great Depression, the nuclear arms race… plus dozens of other wars, financial panics, and economic crises.
Today, the national debt stands at more than $21 trillion– a milestone hit roughly two months ago.
This means that the government added $20 trillion to the national debt in the 37 years between October 22, 1981 and March 15, 2018.
This is a HUGE problem that only gets worse with time. Kicking the can down the road or ignoring the problem won’t make it get better.
The best thing for you to do is to look out for your financial future. Stop spending on frivolous crap you don’t need and save every dime you can!
We cannot rely on the government or anyone else to take care of us. That is pretty obvious by looking at the current state of affairs and who our government is most concerned about.
It is up to you to do everything you can to ensure you have a bright future!
Building Wealth By Buying Rental Properties
Speaking of ensuring you have a brighter future, consider this snippet from the Washington Post:
Rental properties are a powerful wealth builder because they grow value in three ways: They typically appreciate in value over the long run, they harness the power of debt leverage, and they provide monthly income. Most years the value of your property goes up and your mortgage goes down. That’s why you want to use debt in your real estate investing, but you need the right amount of debt. Overleveraging is a financial killer.
This a great article about how you can buy one rental property a year to build your wealth. It does have some blue sky projections and I would caution you to plan for more hiccups than the author does.
Owning income producing rental properties is just one tool you should consider if you want to become financially independent. If you have any questions about buying real estate in the Anderson SC area, Contact Me!
And that is all I have time for today! Please hit those share buttons if you enjoyed this article!