July 30, 2021

Housing: A Little Bit Softer Now

By Michael McKeown, CFA, CPA - Chief Investment Officer

Housing: A Little Bit Softer Now

As the peak home buying passes this summer, home price bidding wars are slowing a bit. 

The market is coming off a record low supply of homes for sale in the U.S. at below 2 months. The latest data from June has 2.6 months available for sale. This is far below average. It is extremely low compared to the 10 months of home supply following the housing bubble from 2008 to 2011.

The inventory matters because it has a tight relationship with home appreciation. This past year has seen the fastest monthly increase in home prices with the latest increase at 1.7% from April to May. In the past 21 years, prices only declined when inventory was greater than six months.

Home builders are weary of overwhelming supply.  No firm that survived the last housing bubble wants to go through it again.  Supply chain issues for materials are also slowing sales.

The demand side for homes is only going to increase.  The median age of millennials is 31 years old.  The median home buyer is 33 years old. 

It took 10 years, from 2010 to 2020, for the population of people in their 30s to increase by 4 million.   From 2020 to 2026, another 4 million will be coming of age to their 30s.  This represents even more buyers entering the pool.

We follow housing closely for a few reasons.

One of the largest assets many families own is their home.  Life changes usually drive the buying and selling of homes rather than a pure economic motive. This usually only occurs a few times during a lifetime. Questions often arise around the financial planning for such big events.

Within fixed income portfolios, we own mortgages.  Bonds backed by mortgages are a way to earn a little more interest with a quality asset as collateral.

Zillow’s latest forecast expects home prices to increase 13% over the next year.

People are asking if this is housing bubble 2.0 since prices are climbing at a rapid rate. This is partly due to low inventory. The lowest interest rates in history allow for mortgage payments to support a higher home price as well.  Until these factors change, a decline in home prices becomes less likely.

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