Real Estate is a big contributor to our nations GDP and we all know housing is pretty important
to us overall. It’s so important that the government decided back in 1938 to establish what is
now known as Fannie Mae and then its competitor Freddie Mac in 1970 all in an effort to make
housing more affordable for the average American. Why? Because owning a home has been
touted as the “American Dream.” Yet this dream is seemingly further out of reach the last
few years despite the rebound in housing prices and reduction in foreclosures. Unfortunately,
the burden of housing still stings to many Americans as the correction of the last 7 years has
not reversed the trends emerging from the preceding decades.
Although much of this information is widely available, there is not enough discussion about it. For starters, let’s take a look at some commonly used statistics such as the median sale price of a new home, existing home, and median household income.
From the chart we can see that the price of a new home has increased from 1984-2014 by
254%, which is quite astonishing considering the recent downturn. Data from existing home
sales begins in 1989 and it demonstrates a 121% gain to 2014. New home prices have
registered gains of 135% during the same time period so that the overall trend of higher sale
percentage price gains for new homes remains in place.
| Sale Price Existing Home | Sale Price New Home | Household Income | |
| %Change 1984-2014* | 121.60% | 254.64% | 131.72% |
| %Change 1989-2014 | 121.60% | 135.73% | 83.64% |
| %Change 2004-2014 | 16.50% | 48.28% | 22.54% |
(If you’d like to view a Google Doc Spreadsheet with these calculations click here)
Now if we take a look at household income gains it’s clearly lagging behind the increase
of existing and new home prices. From 1984-2014 household income increased by
131% while from 1989-2014 they increased by 83%(it’s noteworthy the large income increase between 1984-1989). Even during 2004-2014, which includes the peak in real estate prices, ensuing downturn, and subsequent recovery, we still see disparities between the three. During that time, sales of existing home prices increased by 16%, new homes by 48%, and incomes by 22%. It’s intriguing that existing homes have languished during this time as income gains have outpaced the sector. One contributing factor could be that
foreclosures were concentrated within the existing home sector during this time period and
thus have had a substantial effect on price appreciation.
Let’s take a look at the price/income ratio commonly referenced in the housing industry. We
can see that the ratio has been trending upwards for both, but is more pronounced for new
homes. Interestingly, the ratio calculated by Zillow paints a scenario less bleak than reality. My
email to Zillow for direct commenting was met with an automated response.
 |
(Data derived from median housing prices & income provided by FRED) |
was cited to be 24-25 during the 1960’s. If anything, this helps provide ancillary evidence that
the tailing rise in income relative to housing prices has been playing a large role in the housing
affordability for American society. This could lead to increased pressures we have yet to
realize.
mortgage rates are still at the lowest point in decades, but home ownership rates have
continued to decline since the last downturn. What’s significant is that although rates started to
drop in the 1980’s, the home ownership rate did not begin to increase until 1995. Home
ownership has been stuck in a downtrend since the recession despite record low rates. It would
seem that with impending rate hikes from the Federal Reserve this will put upward
pressure on mortgage rates and continued pressure on the home ownership rate. Here, too, it’s
a shame the home ownership data does not go further back than 1984 even though the rate
data goes back to 1971(you can adjust the chart to see this).
Additionally, the down payment percentage for home buyers has been decreasing since 2012 after making steady strides up the last decade. While the dip could be temporary, it bodes watching.
With the Housing Affordability Index (Composite)© now off its highs it bears consideration in the near term. The index is not quite as useful at first glance because it assumes a 20% down payment in its calculation while the average down payment has only reached 16% in recent quarters. In fact, it hasn’t been near 20% at all for the last decade. Note that it could be relevant to you as a home buyer if you are putting exactly 20% down. If you adjusted the calculation with the down payment percentage most Americans make the index would show housing is less affordable. One must always be aware of the information out there and if it really pertains to your situation.
One last compelling piece of information is that cash/institutional buyers
it means less competition for regular home buyers. What it really means is they are no longer finding deals that meet their buying criteria. They no longer see home appreciation, rising rents, and an overall favorable
investment climate for the near term. While some smart money buys at the top, their brethren does not make the same lapse in analysis. When professional investors are buying it means they are snapping up deals ahead of the average person since they typically have limited knowledge to analyze a good investment property. Therefore, it’s only logical that when they are not buying it means deals are not as good.
Furthermore information from the media has likely clouded retail investors perceptions. Think back to the recession. It wasn’t until 2012-2013 the media reached a general consensus that it was a great time to enter the housing market right as institutional investors were hitting their peak. During 2009-
2012 everyone was worried the bottom wouldn’t be in. As the chart above illustrates it was
during that time the big money was moving in full force to gobble up as much property as
possible. Also, note how institutional investors were largely on the sidelines from 2000-2007.
Let us not forget property taxes have a big effect on housing prices. With local governments strapped for cash, they will eventually move to raise property taxes as it encompasses the entire population. An individual’s only defense against rising property taxes is by moving to another locality and they will convince you to support the tax increase under the guise it is for the school system.
Now these are only indications that the market could be in for a rough patch again if home buyers must deal with increased strains from higher mortgage rates and rising house price/income ratios. Time will tell what direction the market will head in.
If you are planning on selling and are concerned about the effects this could have on you, MAD Consulting LLC can offer its expertise in this area. If you’d like to know how you can protect yourself, we can help develop the right solutions to fit your individual needs. Additionally, if you’ve been looking into buying a property we can help you analyze any risks associated with it and if it makes financial sense for personal or investment purposes. We can provide you with a professional analysis of the financial performance of any property with all the major real estate metrics. That’s not something provided to you in an appraisal.
