A drop in the massive housing boom is what the next few weeks will consist of for the author of Cash Chronicles. I am writing this laying on a mat on the floor of the master bedroom of my California property, converting it from a business to a residential property to be rented.
After a number of years of no updates to the home, it’s long overdue and I have to admit that working with the contractors, after working my day job and studying for the CFA have left me more exhausted than usual to pump out my twice weekly posts.
The signs of the boom are all around us in Northern California however. Farm plots which were maintained for years with subdivisions being built around them have finally caved in and sold to the developers. Homes are being sold in a matter of hours in some places. The demand is enough to scare me into keeping my own property here instead of selling it. First I was scared by the fees and taxes that may be incurred by selling it and second by the fear that prices will increase even more and I will be kicking myself for selling now.
The Sacramento area was one of the worst affected during the housing bust with prices falling as much as 50% from peak to trough. But now, after a long slow climb, prices have finally surpassed their housing boom peak and have continued upwards.
My personal contribution to this current boom will be the money I put back into the property as well as towards the contractors helping me.
Although prices are rising fast and it can be quite discouraging for first time homebuyers, it doesn’t seem as if we are in an unsustainable bubble yet. The bust produced years of slow housing starts, even as the population grew. Millennials are finally catching up with others generations in terms of wealth by a particular age and they have been snapping up properties and helping the market surge.
Yet the way this boom is playing out is different as well. Areas in California like Riverside and Sacramento counties are seeing much of the highest home price growth percentage wise, likely due to their proximity to LA and the Bay Area respectively as well as their affordability. Other hot areas include places where homes are more (or were) more affordable like Boise, Nashville and Austin.
Huge Jump
The National Association of Realtors says the media home price has jumped 15.8% year over year as of March. This is a 46.5% jump from 5 years ago. Yet if we zoom into the year by week we see that there were a a few notable spurts.
The first was from April to August of last year when home price growth accelerated from 4% to 12% annually. This ticked up again with the start of the year and has moderated somewhat moving into March, potentially because of the bump in mortgage rates that we experienced when the 10 year treasury note started to climb.
The question is if this type of growth is sustainable. In the last housing boom it clearly wasn’t, as it was driven by loose lending standards to less than credit worthy borrowers. This time supply factors are more in play as well as demand factors.
The home building industry under built for almost a decade following the financial crisis. Jefferies estimates that there is a shortage of 2.5 million homes. Certainly there is a short term supply crunch as the inventory of homes fell by about a third since before the pandemic.
The pandemic produced a sudden shift in the way we consume housing. Those that were able to afford to move and spent more time home, suddenly wanted more space for their gyms and home offices. Buoyed by savings from being shut in, it seems many relatively wealthy millennials saw this as their chance to pounce on a home in a cheaper locale.
Sustained Boom
What drives housing is people and jobs in any location. There have to be the jobs to support the purchases as well as an influx of people to push up demand. Some cities such as Detroit have seen this work in reverse as jobs and people exit together and homes prices collapse.
The same Jefferies report sees a sustained boom in the next few years in housing which will be driven by demographic factors. The old stereotype was that millennials were too indebted and spendthrift to be able to afford houses but the results of the last year have shown the opposite. The prime home buying age tends to be in the 35-44 demographic as people get married, have kids and have some savings to put to work. The next demographic group of 25-34 year olds is 9% larger than the current population of 35-44 year olds, a factor that Jefferies sees creating a more even and long term rise in home prices.
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