Why This Housing Boom is Different from the Last…

The rising home prices and strong demand in the current housing market have some making comparisons with the previous boom in the mid-2000s, but it’s very different according to a new analysis.

Mark Fleming, the chief economist of First American Financial, says that market fundamentals remain strong but there are signs that price appreciation may be slowing.
However, he does not see the risk of a market crash like the one that followed the previous boom.

“The price appreciation experienced in the housing market during the mid-2000s was characterized by a surge in demand driven by wider access to mortgage financing,” he says. “Price appreciation in today’s housing market is characterized by a shortage of supply. The supply of homes on the market remains extremely low, and the homes that hit the market sell very quickly – an indication that demand is outpacing supply.”

Low mortgage rates, high demand, low supply, and the strong US economy, are all supporting the market. And even where buyers pull back, frustrated by a lack of available homes, Fleming expects an easing of prices rather than a slump.
“As buyers pull back from the market and sellers adjust their price expectations, house prices will adjust, but the strong economic conditions and the shortage of supply relative to demand continue to support the housing market,” says Fleming. “We’re seeing the first indications that price appreciation may be slowing, but the underlying fundamental housing market conditions support a natural moderation of house prices rather than a sharp decline.”

Homebuying power is strong
First American’s Real House Price Index for June, which is based on changes in single-family home prices, interest rates, and incomes; shows an increase in prices of 1.5% between April and May 2018, 11.4% year-over-year. Consumer house-buying power declined by 1.0% between April and May 2018 and declined 3.6% year over year.

“While unadjusted house prices are 1.3% above the housing market peak in 2006, consumer house-buying power has increased by 55% over the same time period. House-buying power, how much one can buy based on household income and the 30-year, fixed-rate mortgage, has benefited from a declining rate environment, and slow, but steady household income growth,” Fleming explains.

The five states with the greatest year-over-year increase in the RHPI are Nevada (+21.0%), Ohio (+18.5%), New York (+18.3%), Michigan (+17.5%), and New Hampshire (+17.2%).
No state had a year-over-year decrease in the RHPI in June.

“Consumers buy homes based on how much it costs each month to make a mortgage payment, not the price of the home. Lower mortgage interest rates and growing incomes mean home buyers can afford to borrow more and buy more, which drives price appreciation,” concludes Fleming.

Written by Steve Randall