The housing market has been anything but normal for the last eleven years. In a normal real estate market, home prices appreciate 3.7% annually. Below, however, are the price swings since 2007 according to the latest Home Price Expectation Survey:
After the bubble burst in June 2007, values depreciated 6.1% annually until February 2012. From March 2012 to today, the market has been recovering with values appreciating 6.2% annually.
These wild swings in values were caused by abnormal ratios between the available supply of inventory and buyer demand in the market. In a normal market, there would be a 6-month supply of housing inventory.
When the market hit its peak in 2007, homeowners and builders were trying to take advantage of a market that was fueled by an “irrational exuberance.”
Inventory levels grew to 7+ months. With that many homes available for sale, there weren’t enough buyers to satisfy the number of homeowners/builders trying to sell, so prices began to fall.
Then, foreclosures came to market. We eventually hit 11 months inventory which caused prices to crash until early 2012. By that time, inventory levels had fallen to 6.2 months and the market began its recovery.
Over the last five years, inventory levels have remained well below the 6-month supply needed for prices to continue to level off. As a result, home prices have increased over that time at percentages well above the appreciation levels seen in a more normal market.
That was the past. What about the future?
We currently have about 4.5-months inventory. This means prices should continue to appreciate at above-normal levels which most experts believe will happen for the next year. However, two things have just occurred that are pointing to the fact that we may be returning to a more normal market.
1. Listing Supply is Increasing
Both existing and new construction inventory is on the rise. The latest Existing Home Sales Report from the National Association of Realtors revealed that inventory has increased over the last two months after thirty-seven consecutive months of declining inventory. At the same time, building permits are also increasing which means more new construction is about to come to market.
2. Buyer Demand is Softening
Ivy Zelman, who is widely respected as an industry expert, reported in her latest ‘Z’ Report:
With supply increasing and demand waning, we may soon be back to a more normal real estate market. We will no longer be in a buyers’ market (like 2007-February 2012) or a sellers’ market (like March 2012- Today).
Prices won’t appreciate at the levels we’ve seen recently, nor will they depreciate. It will be a balanced market where prices remain steady, where buyers will be better able to afford a home, and where sellers will more easily be able to move-up or move-down to a home that better suits their current lifestyles.
Returning to a normal market is a good thing. However, after the zaniness of the last eleven years, it might feel strange. If you are going 85 miles per hour on a road with a 60 MPH speed limit and you see a police car ahead, you’re going to slow down quickly. But, after going 85 MPH, 60 MPH will feel like you’re crawling. It is the normal speed limit, yet, it will feel strange.
That’s what is about to happen in real estate. The housing market is not falling apart. We are just returning to a more normal market which, in the long run, will be much healthier for you whether you are a buyer or a seller.
We have all seen the headlines that report that buying a home is less affordable today than it was at any other time in the last ten years, and those headlines are accurate. But, have you ever wondered why the headlines don’t say the last 25 years, the last 20 years, or even the last 11 years?
The reason is that homes were less affordable 25, 20, or even 11 years ago than they are today.
Obviously, buying a home is more expensive now than during the ten years immediately following one of the worst housing crashes in American history.
Over the past decade, the market was flooded with distressed properties (foreclosures and short sales) that were selling at 10-50% discounts. There were so many distressed properties that the prices of non-distressed properties in the same neighborhoods were lowered and mortgage rates were kept low to help the economy.
Low Prices + Low Mortgage Rates = High Affordability
Prices have since recovered and mortgage rates have increased as the economy has gained strength. This has and will continue to impact housing affordability moving forward.
However, let’s give affordability some historical context. The National Association of Realtors (NAR) issues their Affordability Index each month. According to NAR:
NAR’s current index stands at 138.8. The index had been higher each of the last ten years, peaking at 197 in 2012 (the higher the index the more affordable houses are).
But, the average index between 1990 and 2007 was just 123 and there were no years with an index above 133. That means that homes are more affordable today than at any time during the eighteen years between 1990 and 2007.
With home prices continuing to appreciate and mortgage rates increasing, home affordability will likely continue to slide. However, this does not mean that buying a house is not an attainable goal in most markets as it is less expensive today than during the eighteen-year stretch immediately preceding the housing bubble and crash.
Home sales are below last year’s levels, home values are appreciating at a slower pace, and there are reports showing purchasing demand softening. This has some thinking we may be entering a buyers’ market after sellers have had the upper hand for the past several years. Is this really happening?
The market has definitely softened. However, according to two chief economists in the industry, we are a long way from a market that totally favors the purchaser:
In addition, Pulsenomics Inc. recently surveyed over one hundred economists, real estate experts, and investment & market strategists and asked this question:
Only 5% said the market has already shifted. Here are the rest of the survey results:
The market is beginning to normalize but that doesn’t mean we will quickly shift to a market favoring the buyer. We believe Ivy Zelman, author of the well-respected ‘Z’ Report, best explained the current confusion: