The Housing Market is Hot, but Not in a Bubble

The Las Vegas Housing Market Report

Last week the biggest news was that FHFA (the boss of Fannie Mae and Freddie Mac), released the new conforming loan amounts for 2021. While the loan amounts are effective as of 1/1/21, many lenders as we are, will allow for these new loan amounts now. That new loan limit has jumped more than 7% is $548,250. The VA loan limits will track the conforming loan limits (before anyone starts yelling, yes I am aware VA did away with loan limits when the Veteran does not have an outstanding VA loan but they do still have loan limits when there is a VA loan outstanding and the Veteran is looking to purchase another home with a VA loan). FHA will be releasing their new loan limits for 2021 shortly. Those will likely take effect on 1/1/21 and cannot be moved up as they are tied to the date the case number has been assigned. The takeaway that some may not immediately recognize is that these new loan limits will impact sellers as well as buyers. Sellers can now (and I would) use these higher loan amounts when calculating their sales price to maximize those new loan limits.

That was more of a PSA than anything else, but I can use it as a segue way into a topic I am asked about regularly. Is there a housing bubble? It is not unusual, unexpected or unreasonable to ask. Prices have run up and no one knows the future. There is a lot of noise about upcoming defaults and I think it is reasonable to be skeptical. I also see the limited supply of inventory being the biggest factor holding back the market. Potential sellers are reluctant to list their home for fear of not finding another home. We have a long way to go before our market is balanced. Here is a great graph on available homes and what inventory looks like now and looked like over the past two years. 1.7months of inventory (considering that includes all available properties, even the ones unsalable), is constricting and holding back the market.

The housing market is hot, but not in a bubble – Housing Wire

Existing home sales came in at a whopping 6,850,000, beating estimates with the highest print since 2006. Days on market fell from 36 days to 21 days on a year-over-year basis. Cash buyers remain at a historically high level of 19%, the same as last year, while sales grew 26.6% year over year. We have done a lot running around with the existing home sales data to be up just 2.4% year to date.

The housing market is clearly hot.

While we celebrate these strong numbers, keep in mind these three points:

First, expect the data to moderate, so don’t freak out when we see the rate of growth cool down. A normal trend will eventually materialize. You may be told that future moderation indicates “cracks in the housing market, but don’t buy into it.  I previously wrote that if we really saw cracks in the housing market, these are a few indicators to track and to beware of doom and gloom housing headlines.

Second, if the next existing home sales report misses expectations, you may be told that this is due to a lack of inventory. Don’t listen. Remember, lower inventory tends to go with higher sales — and higher sales means folks are buying homes…therefore…I know you are following me here… there must be homes to buy.

Unsold inventory sits at an all-time low 2.5-month supply at the current sales pace, down from 2.7 months in September and down from the 3.9-month figure recorded in October 2019. Inventory is tight, but it’s not non-existent. Tight inventory also encourages builders to create more inventory.

Lastly, we need to keep an eye on home prices. The increase of 15.5% year over year is a concern. My biggest fear for housing in the years 2020-2024 was not that home prices would crash by 30%-50%, as our bubble-boy friends have been telling us since 2012, but that real home prices might take off, creating an affordability issue for some buyers.

We have three exigent factors that could contribute to unhealthy price growth:

First, the years 2020-2024 have the best housing market demographics ever recorded in history. Second, housing tenure is currently at 10 years, double what it was from 1985 to 2007. People are staying in their homes longer. And third, mortgage rates will stay low during these five years of great demographics and long housing tenure. I expect mortgage rates to be below 5% the majority of this time unless some significant fiscal stimulus occurs when the economy is back on track after the COVID-19 crisis gets under control.

These recent reports concur with the strong mortgage purchase application data and pending home sales data we have had since May.

Again, expect these numbers to moderate — that is just part of the process for finding the trend — so don’t freak out. Before COVID-19, housing market data broke out for the first time in a long time. If you look back at the February data, we should have had total existing home sales of  5,710,000 -5,840,000. If we don’t hit those numbers, then COVID-19 took a little of the shine off of the demand, but this demand might just be pushed out to 2021.

Article taken in part from Brad Malkin, Noble Home Loans.

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