Everything Down but the House
The current state of the local housing market
As I stand in line at Costco with a cart full of three things we need and twenty that were just too cool to pass up, a brief moment of sanity strikes me as I realize my portfolio is down and I need to put most of these things back on the shelf. Then, like the evil twin of Jiminy Cricket, a voice reminds me that my house is up in value so it’s all good. Perhaps this is just me, but I have a feeling that many of us justify luxury expenses after assessing net worth progress. The average American household derives 29% of its wealth just from home equity alone. Throughout generations and across the globe, wealth is stored in real estate.
In 2022, home prices in Cincinnati, OH rose 11.5% year over year, according to fhfa.gov. The average across the US was 12.4%, which was led by hot markets in Florida, Texas and Tennessee. Since 2007, the cumulative growth in home values is north of 80%. If measured from the bottom of the housing market in 2011-2012, the growth is nearly 100%. I believe this is partly why the consumer has been so resilient in the face of high inflation in recent years. Normally, the cure for high prices is high prices, but we seem to be immune to the medicine. This hasn’t stopped the Fed from increasing rates, which has pushed the average 30-year mortgage into the 7% range in recent weeks, according to Mica James with Western Ohio Mortgage Company.
Consumer resilience, along with the chart below, prompted me to dig further into our local market so look for signs of weakness. We seem to be getting mixed information which only adds to uncertainty. The Fed tells us they’re trying to slow down the market through “demand destruction” and the recent data provided by the Y-Charts chart of the US median home sale price indicates that it could be working. Not so fast, however. You should notice that the median home sale price declines cyclically during the winter months as buyers, like normal human beings, don’t like to shop in the cold. Todd Finch with Comey and Shepherd offers more insight into the current state of the market, stating that he has seen little to no reprieve in the buyer war dilemma. In the past few days, he represented a client that was party to an offer in the Cincinnati suburb of Oakley in which there were 41 offers for the seller to consider in week one. While somewhat an outlier, multiple bid scenarios are the norm these days. So, what gives? Is the market going to slow down? Are we in a bubble?
Times are good until suddenly, they aren’t. Bubbles have a way of ending catastrophically which then cascade into a general personal malaise, like a canker sore that takes forever to heal. It’s understandable why we are all afraid of a collapse in housing prices. Rest assured that what we see today is not a bubble. Years of underdevelopment in housing combined with America’s largest generation (millennials) fueling demand for housing starts provides fundamental support for growing prices. While demand is intrinsically linked to population growth, supply is much more complex. Many home builders simply closed shop in the wake of the 2008 GFC (Great Financial Crisis), pausing development that has not been caught up. Also, people are living longer in their homes. In an ironic display of bureaucratic ineptitude, Fed policy has exacerbated the issue through rate hikes. Now homeowners don’t want to move because this would mean giving up a 2 – 3% mortgage rate! This has severely limited supply of homes available for purchase, pushing up prices as demand meets supply. Todd informed me that he recently did a search for a client looking for homes in Mason, OH in the $300,000 to $450,000 range and there were two listings. Two, in a city of over 34,000 residents.
Now that we have established that the housing market fundamentals support the thesis of continued price growth, let’s consider the “black swan” angle that killed the market in 2008. The pre-2008 market was different in that supply was greater than organic demand. Demand was goosed through the issuance of what Mica James calls “fake loans”. I recall the use of the term NINJA loans, which stood for ‘No INcome Job or Assets’. These loans were issued to overextended buyers creating an extremely fragile consumer cash flow situation. All it took was a normal pullback in the economy for the house of cards to come crashing down. Books have been written about this in detail and I have read them. Allow me to summarize them for you: It came down to inappropriate issuance and use of leverage. Comparatively, Mica offers a much healthier backdrop to how banks are issuing loans today and in recent years, which usually demand at least 5% down as in the case of an FHA loan. Additionally, lenders have recently increased the limit at which borrowers would qualify for the best terms from a FICO score of 740 to now 780. Banks seem to have learned their lesson and overleverage does not appear to be a current issue.
In conclusion, we are forecasting continued growth in the housing market. This does not mean the possibility of a bubble formation is absent. If the Fed continues to tighten, raising mortgages further, this could artificially lower supply more and create an environment in which only the highest qualified buyers would compete for a razer thin inventory of homes. This would be an unsustainable situation that wouldn’t end well. While this is a possibility, it’s not the case right now. If you are waiting around for a 2008-like collapse in home prices to jump into the market, you may be waiting awhile.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.