In this episode of the REconomy podcast from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi explain why today’s housing market is unlike the housing market that preceded the Great Recession and why we’re unlikely to see a housing market crash anytime soon.
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“The housing sector entered this recession under built, not over built, like last time in 2009, while housing demand has outstripped supply. In fact, in 2019, the last full year in which we had comprehensive data, over 1.3 million new households were formed, while only 923,000 new housing units were produced. That's a shortage of almost half a million housing units. Prior to 2009, the opposite was true, housing supply was significantly outpacing demand. The supply and demand imbalance is one of the other reasons for the rapid house price appreciation today.” – Mark Fleming, chief economist at First American
Transcript
Odeta: Hello, and welcome back to another episode of the REconomy podcast where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American. And here with me is Mark Fleming, chief economist at First American. Hi Mark, I heard recently that a certain Google search has increased in popularity and that it's related to our industry.
Mark: Hi, Odeta. Would you be perhaps referring to the fact that Google reported a couple of weeks ago that the search “when is the housing market going to crash” had spiked 2,450% in the last month, keeping in mind that 2,450% increase on say 10 searches is only 245 searches? So context matters?
Odeta: I am talking about exactly that. Also of note is that how much over asking price should I offer on a home in 2021? Jumped 350% in one week. Admittedly, I may have contributed to that spike in searches.
Mark: Wait, wait, did I just hear you say you made an offer on a home? Did you figure out what your discount rate was?
Odeta: No.
Mark: No, of course not. More seriously, I think we do need to answer the question. Are we headed towards another housing crash?
Odeta: And if so, when is the housing market going to crash. And this whole fear is really rooted in today's super-sellers’ market and the accelerating house price appreciation that we're experiencing. In this month's Real House Price Index. We found that nominal house prices had increased more than 14% on an annual basis in February, and that's the fastest pace since 2005. Additionally, according to the most recent existing-home sales report, which is reflecting March data, the average days on market is 18 days. That's a record low and it's down from 29 days a year ago. Believe it or not, 83% of the homes sold in March of this year were on the market for less than a month. So, a very hot housing market. And it's really no secret that the housing market played a central role in the last recession. And many suffer from recency bias and are quick to assume that history will repeat itself. However, the housing market today is very different from the housing market during the previous housing boom.
Mark: That's right. And so we say this time it’s different. Warning. Warning. But, we really do believe this time is different. The price appreciation experienced in the housing market during the mid-2000s was characterized by a surge in demand driven largely by the wider access to mortgage financing, we might want to call it financial innovation. These innovative mortgage products were actually called affordability products, teaser rates, fixed-to-adjustable rate mortgage structures, all of those things facilitated bigger loans at the same monthly payment to keep up with growing home values. Which of course is one reason why house prices in the first place kept going up. And there was also lots of speculative buying. The investor share of sales grew dramatically in the run up to the housing boom, some may remember all the popular flipping shows on Home and Garden TV.
Odeta: Oh, I love those.
Mark: Right. Looking through history, speculation is one of the surest signs of a bubble. But, all the price appreciation in today's housing market is characterized by a shortage of supply, as you were just mentioning, not financially innovative affordability products, and no spike in speculation. The supply of homes remains extremely low. And that's why house prices are going up. This is an indication that demand is outpacing supply, the low inventory combined with record low mortgage rates, which we've talked about a bunch of times before, and millennials aging into their prime home-buying years. These are all the things that are driving the housing market today, which is different from the house price appreciation boom in 2006.
Odeta: Exactly. And importantly, this time housing is not overvalued. What do we mean by that? Well, if housing is appropriately valued, consumer house buying power, or how much you can afford to buy, given your income and mortgage rates, should equal or outpace the median sale price of a home. The only time period, when we look at the time series of this comparison, the only time period when the median sale price was higher than house buying power was from 2005 through 2007, indicating an overvaluation of housing or a housing bubble. Today, that is absolutely not the case. House-buying power is nearly twice as high as the median sale price of a home, signifying that indeed housing is not overvalued and is, in fact, in a much better position this time around than it was in the last recession.
Mark: And you know what, there's more to the supply and demand story. The housing sector entered this recession under built, not over built, like last time in 2009, while housing demand has outstripped supply. In fact, in 2019, the last full year in which we had comprehensive data, over 1.3 million new households were formed, while only 923,000 new housing units were produced. That's a shortage of almost half a million housing units. Prior to 2009, the opposite was true, housing supply was significantly outpacing demand. The supply and demand imbalance is one of the other reasons for the rapid house price appreciation today.
Odeta: So, housing is not overvalued, supply is not keeping pace with demand. And what's reason number three? Equity. Equity is at historical highs. The housing market today is not driven by loose lending standards, subprime mortgages and homeowners who are highly leveraged. We can see that by the fact that the household debt-to-income ratio is at a near four-decade low. The housing crisis in the Great Recession was fueled heavily by the fact that job losses were paired with a significant share of homeowners who didn't have any equity in their homes. Homeowners today have very high levels of tappable equity, which would provide a cushion to withstand potential price declines, which by the way, we don't expect, but also preventing housing distress from turning into foreclosure. In fact, and I think we've touched on this before in the past, if distressed homeowners are required to resolve their delinquency, given all of that equity buffer, involuntary sales are much more likely than foreclosure. So now, that's the next reason this time it’s different.
Mark: Yes, reason three, check. No mortgage finance innovation this time. In this case, a lack of innovation is a good thing. According to a recent report from the Wall Street Journal, mortgage credit availability, a measure of lenders willingness to issue mortgages is near its lowest level since 2014. 70 percent of mortgages issued in 2020 went to borrowers with credit scores of at least 760. That's significantly up from just two years ago. According to the Federal Reserve Bank of New York, the median credit score of borrowers approved for mortgages reached a high of 786 in the fourth quarter, and I think we're actually getting to the top of the FICO scale with something that high. So, credit is tight, which means credit is safe. And no innovation in this space is another reason why it's different.
Odeta: We rarely hear that no innovation is a good thing today. So that's an interesting way of putting it. So we've pointed out all of the reasons why this time it's different than last time. But, it kind of sounds like what we should be saying is that last time was different, last time was unique. Because it's important to remember that the housing market has actually traditionally aided the economy in recovering from a recession. Consumers who are less affected by the downturn are willing to buy and sell. And existing homeowners are able to take advantage of equity in their properties, which can help get other parts of the economy moving. So typically, housing is a bright spot in the economy. Last time was different. And so, will the housing market come crashing down this time? Sounds like it's a no.
Mark: I think it's a no, but I think it's interesting to point out there was an adage prior to the housing crash that house prices never went down. And that was part of the reason why everyone felt so sure that we could sort of run up house prices indefinitely. We realized that yes, indeed, house prices can go down. And maybe it's a good thing that we're asking these questions and having concerns about a housing crash. Because now, we don't believe that house prices can always go up or never go down. And, therefore, we won't behave in a way that could cause another housing bubble. Real estate markets tend to move in cycles, they don't always end in a bust. Now, as rising prices, and modestly rising mortgage rates undermine affordability, that's true. And buyers like you Odeta are struggling mightily to find something to buy with so little for sale. It's natural that we may eventually begin to see some price moderation. But, given the pace of house prices today, price moderation is not the same as a price collapse. And, as buyers pull back from the market and adjust their price expectations, everything will adjust. Supply and demand will come back into line. And you could basically get a rebalancing of the market relative to fundamentals without a sharp decline in prices or a crash.
Odeta: Well, you heard it here. We are not in the midst of a housing bubble because a bubble implies an eventual pop. The housing market today is not the same as the housing market during the bubble years. So Google searchers, did we answer your question? I sure hope so. Thank you for joining us on this episode of the REconomy podcast, be sure to subscribe on Apple, Google, Spotify or Your favorite podcast platform. You can also sign up for our blog at Firstam.com/economics. And if you can't wait for the next episode, follow us on Twitter @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
