Wednesday, August 10, 2016

Mid Year Real Estate Update

It's time for our mid-year real estate update. Lately there has been some upbeat news in the housing market. Prices across the nation are higher, existing and new home sales are better, and it's even reported in some localities that prices are above their pre-recession peaks. I've highlighted most of this in various posts the last few months. 

But let me start with my favorite chart depicting "Real Housing Prices", which is house prices adjusted for inflation. I've also included the 30 year mortgage rate and as we can see it is near all time lows. Yet the real prices of housing have barely made it back to where they were in 2005. Worst yet is the Federal Reserve is eventually going to raise rates which means more headwinds in this rate sensitive sector. Low rates have been a big source of strength in the post-crash recovery so it bodes watching what will happen after they begin to rise. 

So if you aren't lucky enough to have lived long term in Denver, Houston, or Pittsburgh where prices have surpassed pre-recession peaks in real terms you are likely sitting on a home that's not a great "investment". Finding it odd there are only 3 major cities where prices have passed their pre-recession peaks in real terms? Not even screaming hot San Francisco could do it. In essence housing is not providing the "inflation hedge" you're likely to hear "savvy" people discuss.  

There is an interesting divergence starting to accelerate in the housing sector. Here I've taken all the housing units in the country and divided it by the non-institutional population.
I've then layered in the All Transaction Housing Price Index. The ATHPI is not inflation adjusted so it reflects the nominal prices(click here for a definition). What the housing trend indicates is that there are fewer houses per person, while the nominal prices are rising. That is certainly understandable since the supply of new housing has lacked in recent years. So it's my interpretation from this chart that the current housing market strength is due to lack of supply more so than demand. If demand was there builders would be pumping out more houses. 

How do I know builders aren't building? Check out this graph detailing housing starts, and newly constructed homes for sales(previously highlighted here). New houses for sale is way below it's historical bottoms, and for housing starts you have to go back to the early 1990's to find numbers this low before the recession. 

Astute readers might say "I thought you just mentioned in a MAD Weekly Review that total construction spending is over $1 trillion?" True total spending is actually closer to $1.13 trillion, and residential spending is hovering around $450 billion/yr but that's still down from the pre-recession peak of $680 billion. But let's look at residential construction spending specifically, and then adjust it for inflation. Yep a long way off still. 

"Well heck I thought foreclosures are way down and basically back to normal?" Nope. According to Realty Trac there are still approximately 912,000 homes at various stages of foreclosure(0.67% rate*). Let's not forget government programs have so far helped 1.75 million homeowners avoid foreclosure. These people are otherwise unable to afford their homes thus the foreclosure rate is artificially low. If we add these homeowners back to the foreclosure pool we'd get a 1.96% foreclosure rate**.

Even the delinquency rate on mortgages is still above pre-recession levels. This highlights how many people are still struggling to pay their bills each month(they should contact us). No wonder why so many people are voicing their anger in this year's Presidential campaign. They've gone through 8 years of struggle. 

In one of my first posts on real estate I noted the Price/Income ratio. Not much has changed here as this is a longer time series, and the trend is still heading in the wrong direction for many people. In total it looks like I've painted a pretty bleak picture. I'd rather give a downbeat attitude on housing than pump it up with fanfare right now. Reason being it's documented well throughout history that your house is not the best investment around. It can be if you know how to analyze properties like the pros, and treat it as a business. 

For most people they simply look at the mortgage/property tax is $1,000/mth and it can be rented for $1,200. Cha-Ching it's a great investment! If that's your basic analysis and it's been working for you great. If not then you need to look at what's not working. That's one of the services we provide here. I try to help individuals looking to get a leg in the industry by providing them with my own proprietary analysis on income producing properties. It's the same model I use to make my own purchases. The best thing is it will likely cost you less than your home appraisal which provides you nothing in my opinion. This at least can help put the odds in your favor so you're not stuck with a money pit. Not sure if you have one then read this

* 912,000/135,474,000 = 0.67%
**Calculated using 912,000 + 1,750,000 divided by 135,474,000 total housing units = 1.96%

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