If you are waiting for the housing bubble to burst – wait no more!
There’s a lot of talk in the media about housing slowing. Sales numbers are lower and prices are 41% higher than they were in 2006... With many out there are saying that we're in a housing bubble. Let’s breakdown some of the numbers and comparisons to 2006.
When we take a look at appreciation, it has been on a tear! Appreciation has been going up and accelerating every single month over the last year.
What you’re looking at above is the Case-Shiller Home Price Index (HPI). It's really the gold standard for appreciation and you can see, starting in June 2020, how every single month appreciation has accelerated on a year-over-year basis.
Recently it was actually at 18.6%.
So first of all - the media wants you to believe sales are a little slower and because of that, there isn't enough demand for housing. But if you take a look at sale numbers, they haven’t fallen off a cliff! They are tough comparisons from last year, where we saw an enormous amount of home sales being done. If we were seeing a lack of demand out there, you wouldn’t see appreciation continue to accelerate month after month after month.
Appreciation is a pretty simple metric. If you have more demand than supply, it bids the price of homes higher. Therefore, we are seeing prices of homes bid higher because there is such strong level for demand. The real issue is inventory. If there were more homes for sale, there would be more sales being made.
But let’s take a look again at 2006 vs. today. Many in media say, “Hey, home prices are 41% above the 2006 peak and because of that - they’re unaffordable - and we are in a housing-bubble-like conditions once again. But here’s what the media forgets as to why customers buy homes.
They don’t just buy a home based on the home price. Most of the time they buy a home based on the monthly payment and while the home price is a factor, there are other factors at play that you have to look at. You can’t just look at housing prices in nominal terms from 2006 to today! You also have to look at income as well as interest rates.
When we take a look at interest rates in 2006, they were above 6%. Today, they're under 5% or at least right around 5%. So interest rates are actually 1% lower today than they were in 2006.
But how about incomes?
In 2006, average hourly earnings were $20 per hour. Today, they are $31 per hour! That’s a 55% increase from 2006. And this actually includes all wage earners!
You could certainly make the argument that people that are actually in the home-buying market had incomes increase at a large percentage than that. We respect anyone out there working. But those that are working at maybe a lower paying job are likely not going to be representative of those who are in the market to purchase a home - at least not yet. You could argue that incomes are actually rising at a faster pace than 55% from 2006.
Let me show what home affordability looked like in 2006 compared to today.
We'll use a $300k home as an example. In 2006, with rates about 6% during that time, your monthly principle and interest payment would be $1,798/month. You would need to qualify for this home by having $6,000/month household income. That means that their mortgage-payment-to-income ratio would be about 30%.
Fast forward and take a look at 2022 and home prices. Let’s use the media's figure of 41% higher... That $300k home would be $423k home. However, rates are not 6% today - they're closer to 5%. Your monthly principal and interest payment would be $2,270. But how about your income?
Remember, income has gone up 55%. That means the same individual making $6,000/month would today be making $9,300/month. Guess what that does to your mortgage-payment-to-income ratio? It becomes 25% - so make sure you use some statistics like this when you’re combating some of the stuff out there in the media.
The media has been negative on housing and want you to believe that there’s going to be a housing bubble. If any of you were scared into believing the media, you would have missed an unbelievable opportunity for wealth creation.
But now you have the facts. The appreciation we are seeing today is because of real strong demand demographics, which are going to continue to increase based on birth rates, individuals turning of age to buy a home, and real tight supply
If you compare the demand to 2006, we now have 12 million more households. If you compare the supply, we have 2.5 million less homes for sale.
It is no wonder we are seeing such strong appreciation numbers.
Why did we see home prices move higher in 2006? Why did we see such demand for housing? It was totally different back then. We had more supply than demand, but what you also had was widely available credit.
You had people that could - for lack of a better term - fog up a mirror and be approved for a home.
We see much tighter underwriting guidelines today, and much healthier mortgages being done.
I think our future scenario would look more towards a slowing appreciation over the coming years. We don’t want to continue to see 18.6% appreciation, because that could be troublesome. but I think we’ll continue to see a moderating level of appreciation. There’s a big difference between saying slower appreciation and seeing price declines. Go buy a home or two, if you can.
If you are waiting for the housing bubble to burst – wait no more!
There’s a lot of talk in the media about housing slowing. Sales numbers are lower and prices are 41% higher than they were in 2006... With many out there are saying that we're in a housing bubble. Let’s breakdown some of the numbers and comparisons to 2006.
When we take a look at appreciation, it has been on a tear! Appreciation has been going up and accelerating every single month over the last year.
What you’re looking at above is the Case-Shiller Home Price Index (HPI). It's really the gold standard for appreciation and you can see, starting in June 2020, how every single month appreciation has accelerated on a year-over-year basis.
Recently it was actually at 18.6%.
So first of all - the media wants you to believe sales are a little slower and because of that, there isn't enough demand for housing. But if you take a look at sale numbers, they haven’t fallen off a cliff! They are tough comparisons from last year, where we saw an enormous amount of home sales being done. If we were seeing a lack of demand out there, you wouldn’t see appreciation continue to accelerate month after month after month.
Appreciation is a pretty simple metric. If you have more demand than supply, it bids the price of homes higher. Therefore, we are seeing prices of homes bid higher because there is such strong level for demand. The real issue is inventory. If there were more homes for sale, there would be more sales being made.
But let’s take a look again at 2006 vs. today. Many in media say, “Hey, home prices are 41% above the 2006 peak and because of that - they’re unaffordable - and we are in a housing-bubble-like conditions once again. But here’s what the media forgets as to why customers buy homes.
They don’t just buy a home based on the home price. Most of the time they buy a home based on the monthly payment and while the home price is a factor, there are other factors at play that you have to look at. You can’t just look at housing prices in nominal terms from 2006 to today! You also have to look at income as well as interest rates.
When we take a look at interest rates in 2006, they were above 6%. Today, they're under 5% or at least right around 5%. So interest rates are actually 1% lower today than they were in 2006.
But how about incomes?
In 2006, average hourly earnings were $20 per hour. Today, they are $31 per hour! That’s a 55% increase from 2006. And this actually includes all wage earners!
You could certainly make the argument that people that are actually in the home-buying market had incomes increase at a large percentage than that. We respect anyone out there working. But those that are working at maybe a lower paying job are likely not going to be representative of those who are in the market to purchase a home - at least not yet. You could argue that incomes are actually rising at a faster pace than 55% from 2006.
Let me show what home affordability looked like in 2006 compared to today.
We'll use a $300k home as an example. In 2006, with rates about 6% during that time, your monthly principle and interest payment would be $1,798/month. You would need to qualify for this home by having $6,000/month household income. That means that their mortgage-payment-to-income ratio would be about 30%.
Fast forward and take a look at 2022 and home prices. Let’s use the media's figure of 41% higher... That $300k home would be $423k home. However, rates are not 6% today - they're closer to 5%. Your monthly principal and interest payment would be $2,270. But how about your income?
Remember, income has gone up 55%. That means the same individual making $6,000/month would today be making $9,300/month. Guess what that does to your mortgage-payment-to-income ratio? It becomes 25% - so make sure you use some statistics like this when you’re combating some of the stuff out there in the media.
The media has been negative on housing and want you to believe that there’s going to be a housing bubble. If any of you were scared into believing the media, you would have missed an unbelievable opportunity for wealth creation.
But now you have the facts. The appreciation we are seeing today is because of real strong demand demographics, which are going to continue to increase based on birth rates, individuals turning of age to buy a home, and real tight supply
If you compare the demand to 2006, we now have 12 million more households. If you compare the supply, we have 2.5 million less homes for sale.
It is no wonder we are seeing such strong appreciation numbers.
Why did we see home prices move higher in 2006? Why did we see such demand for housing? It was totally different back then. We had more supply than demand, but what you also had was widely available credit.
You had people that could - for lack of a better term - fog up a mirror and be approved for a home.
We see much tighter underwriting guidelines today, and much healthier mortgages being done.
I think our future scenario would look more towards a slowing appreciation over the coming years. We don’t want to continue to see 18.6% appreciation, because that could be troublesome. but I think we’ll continue to see a moderating level of appreciation. There’s a big difference between saying slower appreciation and seeing price declines. Go buy a home or two, if you can.
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