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Home Value Forecast: Don’t Fret Yet – Housing Market Doomsday Forecasts Not What They Seem

A recent CBS News MoneyWatch article, 3 Reasons to Worry About the Housing Market, paints a dreary picture for the future of our industry. The article cites affordability, sales activity and demographic trends as reasons to worry.

While we do acknowledge a slowdown, Home Value Forecast does not share the same view as the article that “storm clouds are gathering.” Now, let’s look at what the article describes as “the three growing headwinds” facing the housing market, and why our outlook is decidedly more positive.

Affordability

The article states that affordability is going down – this is true. After the 2008 crash, affordability was artificially high due to foreclosed properties flooding the market and historically low interest rates. Overall, affordability is returning to pre-crash norms. Looking at the Household Financial Obligations as a percent of Disposable Personal Income shows the same trend.

household financial obligations graph

Each year, the U.S. Census Bureau publishes its Household Income Brief, outlining average household income trends in the 25 most populous metropolitan areas. For the 25 metros we looked atf peak home prices before the crash, what that equates to in 2018 dollars and the current average home price.

  • More than 11 years later, 8 of the 25 metros are still below pre-crash peaks.
  • If you add a cost of living adjustment, 16 of the 25 metros are below pre-crash highs.
  • The 9 metros that are at new highs: Atlanta; Charlotte; Dallas, Denver; Houston; Portland, OR; San Antonio; San Francisco; Seattle are all experiencing rapid growth in their business base.
  • Pre-crash, 14 of the 25 metros had an “Affordability Index” under 100 – today there are only 4: Los Angeles; Miami; San Franciso; Seattle.

An “Affordability Index” is calculated by looking at the ratio of median income for an area compared to the mortgage payment needed to purchase a median priced home. An index score above 100 signifies that a household earning the median income has more than enough income to afford the mortgage. Lower scores suggest more income is needed to cover mortgage expenses. The Collateral Analytics Affordability Index used by Home Value Forecast also looks at loan-to-value norms for a particular area to adjust for more affluent buyers usually putting more money down.

  • Of the 25, only one metro, Denver, has an affordability index lower than before the crash. As we discussed in an earlier HVF, we don’t believe this is a bubble.
  • San Francisco has the lowest affordability (63). While this is low, it’s still not like the bubble territory of 1989 or 2007.

Sales Activity

The article shows how the average price for newly constructed homes has gone up while the number of units has gone down – both are true statements.

Large single-family developments are still being built, but at a slower pace. More building is being done in cities (both single and 5+ unit structures), where existing dwellings are either torn down or rebuilt. To make a profit, these new dwellings have to be at a higher price point, something we’ve seen happening in Nashville and San Francisco.

In terms of building patterns, single-family housing starts have been lagging.

Multi-family housing starts, on the other hand, have been above pre-crash averages for the past four years, making up some of the shortfall.

Demographics

The article ends with a look at millennials, and suggests that “the longer this generation delays homeownership, the more baby boomers looking to downsize will be pressured into lowering their home prices when they enter retirement.” One could reason that this could impact the affordability issues referenced earlier in the piece.

In closing, Home Value Forecast does not see “storm clouds gathering,” instead we see a return to market fundamentals where home prices are driven by supply and demand, not overly influenced by a wave of foreclosures and its lingering impact.

About Home Value Forecast

Home Value Forecast (HVF) is brought to you by Pro Teck Valuation Services. HVF provides insight into the current and future state of the U.S. housing market, and delivers 14 market snapshot graphs from the top 30 CBSAs.

HVF is built using numerous housing and economic data sources. The top 750 CBSAs as well as data down to the ZIP code level for approximately 18,000 ZIPs are available with a corporate subscription to the service.

Also, Pro Teck Valuation Services offers reporters the following:

  • National, regional or metro level housing data
  • Monthly updates and HVF insight articles
  • By-request data for your story — custom data, heat maps and charts are available
  • Expert commentary from the Home Value Forecast Editorial Committee:
    • Tom O’Grady, Chief Executive Officer, Pro Teck Valuation Services
    • Michael Sklarz, Ph.D., President, Collateral Analytics
    • Thomas Hoff, VP, Marketing & Communications, Pro Teck Valuation Services
    • Jeff Dickstein, Chief Compliance Officer, Pro Teck Valuation Service