Thursday, September 23, 2021 / by Anne Rose
Kirk Pugh, with Real Estate state-of-the-market observations, at the end of the third quarter for 2021:
Let's talk about this crazy housing market some. I'd like to run through some statistics because I'm kind of a numbers nerd. And then we'll talk about something a little less quantifiable, although still supported by some of the numbers that the research analysts at Morgan Stanley have put together.
There's been a little bit of chatter, and there have been some rumblings in some of the mastermind groups that I'm a part of, that the market has slowed some, and the numbers kind of support that. So I'd like to talk about the numbers and then talk about why I think the numbers are what they are.
Let's just look at numbers again. These are through July because Morgan Stanley's research always runs about a month behind.
- Existing home sales: down nine and a half percent month-over-month for the year
- New home sales were down significantly - almost 20%
- Purchase mortgage applications down 18%
So that tends to say that the market is cooling off a little bit. Let's talk about why.
We know that prices are up, and prices of existing homes up about 18% in the trailing twelve months. We know that the payment is inching up, all those still comparable to the long run average when you look at it relative to income. Principal and interest payments to income, historically 20.5% of income, currently running at 20.1%. So a little bit lower for first time homebuyers. Payment - principal and interest payment-to-income - historically about 23.2%. Currently, the average for this year is 21.1%.
So there's still affordability, even though the cost of money has gone up just a little bit. We've got a couple of interesting things going on. Builders: they're starting more homes than ever, up 20% year-over-year. And the number of housing starts is up above the long run average - this is a national figure - but roughly a thousand housing starts per week, 52 weeks a year. And for the last couple of months, the number of starts have been above that long run average of 1000.
And let's talk about that long run average of housing starts. So in order to keep up with demand, young people getting a little older, getting their first job, buying their first house, people moving out of apartment living or rental dwellings into homeownership. Historically, builders across the country had to start about 1000 homes a year just to keep up with new household formations.
So when the market crashed in '07-'08, that number of starts, builders basically stopped. The number of homes being started each week for the years dipped somewhere between four and 500 starts per week. And that trend continued until January of this year.
So more than ten years where the number of starts was not keeping up with the pace of demand and what that created over that decade - between a 2008-2018 - was a housing shortage of somewhere around 10 million units nationwide. So this is not a case where we have rising prices in a really competitive market due to a flood of unqualified buyers, perhaps like we did in 2006. This is due to the industry - the building industry - not keeping up with demand for a decade, and now we're trying to catch up.
So, I read a statistic the other day that said that builders would have to increase production by 40% and maintain that pace for a period of five years just to get us into a balanced market where we had an equilibrium between the number of houses being sold and the month's supply of inventory. Currently that month's supply is about 1.2 million homes on the market nationwide, that translates to about (depending on what part of the country) a three to five weeks supply of inventory.
So we are definitely still in a seller's market, and there's not really any indication that that's going to change anytime soon. Let's talk about why the market is slowing despite the fact that we still have affordability, we have an increasing number of new homes available for sale and all things, and there's still pent up demand from the last decade.
Consumer sentiment, I think, is playing a larger role in this. I know, particularly in what I call the "first time homebuyer" or maybe the "second time homebuyer markets," consumers are just fed up, right? Sellers have read and believe the media hype that people are willing to pay exorbitant prices for homes. So sellers have gotten (sorry sellers!) a little greedy, a little overly optimistic about what their home is worth. And buyers have gotten frustrated with having to make offer, after offer, after offer, just in order to put a house under contract. So they've said, "Enough, I'm just going to wait."
I think the challenge there is that the people who are saying, "I'm just going to wait a year or two," may end up waiting three or four to get to an environment where there's more availability of homes on the market. I think consumer sentiment, which is printing at a 30% optimism rate, is really, really low. It's near 30 year historic lows for consumer sentiment saying that now is a good time to buy a house.
I had a conversation just the other day with a client who said, you know - and they're looking at the luxury market - and they said, you know, we're $800- $900,000 is their top end. And they said we may want to rent for a year until we get a feel for the area. And I said, "Well, that's certainly an option for you. But you have to understand that the $800,000 house today at our current rate of home price appreciation sitting at 18%, that house might be $960,000 a year from now if it's available at all."
People want to think very carefully about the whole rental scenario because the rental market is also tight, particularly in our area. It's still less expensive to purchase a home than it is to rent. So lots of things going on in the market. Consumer sentiment, I think, is driving the slow down a little bit.
Kids are back in school.
People have been on vacation for a good part of the summer.
So, I think maybe that always has a little bit of a seasonal effect on the business that's being transacted.
I know personally for our team, we have not seen a slow down. Our gross volume is up almost 42% year-over-year. Our average transaction value has gone from the upper 200s into not quite the mid-300s, but well into the 300s, which is encouraging for us. And this month of September, we've put a little over $11 million under contract just this month, with a total of about $25-26 million pending. We've helped over 202 families so far this year and hope to hit that 300 number by the end of the year.
So the market is good. It is frustrating if you're a buyer. It's also frustrating if you're a seller and have nowhere to go.
A lot of external forces pushing and pulling on the market. But there's no weakness in the real estate market. There's no risk of any kind of a collapse, because when you look at the risk analysis that the banks have right now, the number of mortgagees that are in default or in forbearance is miniscule. And even though lending standards have loosened just a hair, the banks are being very, very diligent about making sure that they're lending money to qualified buyers that are going to be able to pay the loans back.
So God willing and prayers that we get through this Covid thing sometime... who knows? I know locally, here we're on a mask mandate in New Hanover County. Other counties don't have them. Breakthrough cases and cases - new cases - of unvaccinated people are probably as close to, or higher, than they were during the height of the pandemic back a year ago in April and May.
But we're figuring out a way to do business despite it.
We're here to serve our clients.
We appreciate all the business that you've sent to us so far this year. We look forward to doing business with you throughout the remainder of 2021 and all the way through 2022.
Any questions, you can always call me at 910-622-3478. I hope you find this information meaningful and useful. Thank you.