If you will, think of me as a doctor and the housing industry as my patient, with the patient in my office to discuss the results of its annual physical.
I tell the patient that I have just recently reviewed about 100 of its vital signs (provided by the savvy housing analysts at Deutsche Bank). The patient asks me to cut through all that clutter and focus on four indicators: housing prices, the mortgage market, housing demand, and housing supply.
I inform them that the report on housing prices is pretty good. Prices have appreciated at about 5% annually for the past five years, and as a result, prices nationwide are close to their peak in 2006–2007. That means that only about 10% of homeowners with mortgages are now underwater, down from 32% in 2012.
“That is pretty good news,” says the patient, “but what about the mortgage market?” I let them know that there’s not much to worry about. Rates are still historically low—around 4% for a fixed-rate mortgage. Moreover, credit availability, which had been so constrained, has just about doubled in the past four years.
Also, cheap money has done wonders for housing affordability. In 2007, at the peak of the boom, the average homeowner committed 25% of his income to meet his mortgage payment. It’s only 15% today.
The patient perks up and asks whether that is driving up housing demand. “You bet,” I answer. It’s one reason traffic of prospective buyers is back to peak levels. Another reason is that annual household formations are again near their long-term average of 1.2 million.
Then there’s the good news that the homeownership rate, which free-fell from almost 70% to less than 63% over the past 15 years, is inching back up.
“Is all that demand affecting the supply side?” asks the patient. “Not as much as you might think,” I respond. There’s no glut of unsold houses, new or old. And, while single-family starts and permits have tripled since their low of 300,000 in 2010, they’re still not half as high as they were in 2006–2007. So, if you’re worried about overbuilding, you can relax for now.
However, I inform the patient that there are a few things to be concerned about in the near term. For one, new homes on average cost 28% more than existing homes, in part because the average size of a new home has crept up to 2,700 square feet. At the same time, nobody has really solved the starter home puzzle, even though millennials now outnumber baby boomers and are beginning to marry and have children, which typically triggers home purchases.
But all in all, this new, leaner, meaner version of the housing industry is in pretty good shape. As such, my advice to the patient is to keep doing what you’re doing and come back to see me in a year.
