It seems like every day I’m reading fearful articles about a looming housing crisis.
Forbes wrote: “Pending Home Sales Plunge to Lowest Level in Nearly a Decade.”
Seeking Alpha posted: “The Air Is Coming Out of the Housing Bubble.”
Fortune warned: “The Cooling Housing Market Enters Into the Great Deceleration.”
Many Americans are looking for answers. Google searches for “housing crash” have surged in recent years.
(Source: Google Trends.)
Although I don’t see a housing crisis on the horizon, I can understand the fear.
When looking at the median net worth of Americans, home equity accounts for 65% of that wealth.
Couple that with what happened in the 2007-2008 crash, and it’s easy to see why many are concerned.
Despite these fears, we’re still looking at higher prices for the foreseeable future.
And the latest data shows why that’s the case.
HOMEBUILDERS GOT A WAKE-UP CALL
For some, U.S. home prices appear to be on the verge of cracking.
After new and existing home sales both reached a 14-year high in 2020, sales have been trending back to normal levels.
Considering rising mortgage rates and housing prices, this was expected.
But homebuilders got a wake-up call last month. New home sales fell 16.6% between March and April.
This was a huge surprise for economists, who only expected a 2% drop.
The slowdown in sales has created the largest inventory of new homes since 2010. It would take nine months to sell out inventory at last month’s sales pace.
Although this warrants some concern, the inventory problem isn’t nearly as bad as it seems.
THE STAGE IS SET FOR HIGHER HOME PRICES
New home inventory doesn’t tell the whole story. You also have to look at existing home inventory.
U.S. existing home inventory has been trending lower for several years. At its current level, it would take just over two months to sell out inventory.
I expect low levels of existing home inventory to continue into the foreseeable future.
With mortgage rates nearly doubling since early 2021, existing homeowners are likely satisfied to remain in their current homes.
This should continue to keep supply in check.
(Sources: National Association of Realtors, Bankrate.)
And what about demand?
Even though the media talks about declines in home sales, the big picture isn’t too concerning.
Existing home sales are still above their 10-year average.
Future demand should remain strong thanks to rising rents.
According to Realtor.com, the median rent for a two-bedroom apartment has risen 45% over the past two years.
Although this only accounts for the top 50 metro areas in the U.S., it serves as a good barometer for the state of the national rental market.
I expect rising rents will drive demand from first-time homebuyers who are currently renting and have cash on the sideline.
Couple this demand with the tight supply we’re still seeing in existing homes, and the stage is set for higher prices.
But keep in mind the rapid growth we’ve seen since 2020 is an anomaly.
I wouldn’t bank on growth of that magnitude to continue.
By, Steve Fernandez