Housing Recovery: Boom or Bust
Two questions we are frequently asked are whether or not it is a good time to buy a house and whether the housing market can continue to improve with rates rising as shown in the graph below (click to enlarge).
The answer to whether it is a good time to buy a house depends a great deal upon an individual’s personal situation but as a general statement, we feel that it is a decent time to buy real estate and that the housing market should continue to improve even now that rates have increased. Currently, home inventories are incredibly lean, with less than five months of existing home sales. To put this in perspective, more than 10 months worth of inventory was available in 2008. Last year, the supply fell to 5.9 months of inventory. As a frame of reference, a healthy supply of existing homes is around six months. In addition, shadow inventory levels have fallen, which is the number of properties that are 90 days or more delinquent or in foreclosure. A reduced number of properties that are in foreclosure or delinquent means this should put less downward pressure on home prices, another plus for housing.
An increase in consumer demand, disposable income (graph below), and a decrease in the unemployment rate are additional factors which will likely help to support home prices as well. Many consumers stopped buying homes during the worst of the financial crisis, leading to pent-up demand. Recently, many of these consumers have re-entered the market. In addition, household disposable income has steadily increased since the financial crisis, all the while the unemployment rate has decreased. All of these elements are positive forces which will likely outweigh the impact of an increase in interest rates/ rates.
The risks rising rates could have on the housing market are certainly present. If rates rise before income levels can keep pace, home sales could decline. If rates increase faster than consumers’ incomes, then home values will likely stay put, either until income levels catch up with rates or home values will have to decline in some markets, such as on the coasts. Rising rates could generate a few positive feedback loops, however. Rising rates could stimulate banking activity, as financial institutions loosen their tight credit standards. With home prices rising, default risk on mortgages has declined. Couple this with a higher rate that banks can earn on loans, and they will suddenly become much more willing to grant loans to consumers, as the collateral of the loan (the house) has substantially improved, as well as their profitability on the loan.
Trying to time interest rates is similar to trying to time the stock market. It’s near impossible to get it right. While the hike in mortgage rates in recent weeks could slow activity in the housing market temporarily, the underlying reason individuals are looking to buy a house has not changed. Housing still remains a bright spot in the economy, as the sector should still grow at a decent pace in the long-term.
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