The first thing we all learned in economics class was the law of supply and demand. Tight supply and high demand are very supportive of prices. And that’s exactly the state of the current real estate market for most of the United States.
While there are numerous other positives in today’s real estate market, it’s wise to consider potential adverse factors as well.
The Fed has forecasted three rate hikes for 2017, which would lead many to believe that rising rates may hurt the housing market. While the Fed is forecasting three hikes, it’s no secret that the Fed has a terrible track record when it comes to projecting what it will do in the future.
On top of that, the current Fed is even more dovish than the 2016 version. This means the Fed may “talk” a good game on rate hikes, but it may have difficulty actually pulling the trigger. But even if it does, rate hikes don’t always mean higher mortgage rates.
In fact, mortgage rates are more closely impacted by inflation… and the outlook for inflation is pretty tame. That said, we do think mortgage rates will be a bit higher in 2017, but the housing market is certainly strong enough to withstand a modest increase in mortgage rates.
We begin 2017 with the supply of homes being very tight. There is just a four-month supply of existing homes, which is near historical lows. And the percentage of available homes is a slim 1.75% of the housing stock.
Let’s compare this to more difficult times for real estate. During difficult periods, 4% of the housing stock was for sale (and there were times when a nearly 12-month supply of homes was on hand).
Exacerbating the current lack of supply is the dramatic reduction in foreclosure inventory. Since 2013, the number of foreclosed homes for sale has dropped from 1.5 million to a little over 300,000.
While supply is tight, demand is strong. Led by Millennials, the demand for homes continues to be on the rise. In 2015, household formations eclipsed the number of homes being introduced to the marketplace for the first time in 15 years.
In 2016, this difference between household formations and housing completions was enormous—formations of new households were nearly double the number of homes being added to the marketplace. And this trend should continue, led by the largest population group in the United States… Millennials.
Millennials (those born between 1981 and 1997) will shape the landscape of many industries in the coming years… especially real estate. Yes, it’s true that Millennials carry more student loan debt than previous generations. And it’s also true they’re waiting longer to purchase homes and start families. But that doesn’t mean they’ve abandoned the dream of owning their own homes. They are just waiting a bit longer to do so.
Right now, about 40% of Millennials live with their parents. But they won’t live there forever. Many will move into rental units. And eventually, you can expect them to buy homes when they realize that renting is essentially throwing money away (plus, rents are rising at about 4% per year).
According to Zillow, the median age of a first-time homebuyer is 33. So, let’s do some math. When we look back at Millennial births from 33 years ago, we can see that generation’s birth rate is practically certain to increase every year for the next nine years.
And in the next few years, many of these first-time home-buying Millennials will upgrade to more expensive homes as their incomes increase and families grow. All this bodes well not only for the new home construction market, but also for any industry that’s ancillary to real estate
In addition, incomes are rising at a pace that can easily support the appreciation in real estate, even if mortgage rates do rise.
Investors (and anyone with an interest in buying or selling a home) would be wise to keep this in mind when they hear noise about a housing bubble.