Housing Bubble? ...or Supply Crisis?
By David Huey, CEO Sound Capital
Nearly everywhere you turn, the media is calling it a “Housing Bubble,” like it’s 2008 all over again. Pundits fuel concerns about affordability and the FED’s tightening monetary policy, which are both legitimate issues.
However, the media’s approach is all about capturing our attention - and there’s a missing narrative. The substory includes the current data and analytics and what the underlying MATH is telling us.
What is real estate math and data saying?
How about population trends, history, and economic cycles?
What are these crucial data points suggesting?
...are we headed into a housing bubble?
Well, let’s look at the last housing bubble and compare it to today’s real estate environment and see what it tells us, if anything.
First, let’s talk about the most fundamental law of economics…
The Law of Supply and Demand
In the five-year runup to the Great Financial Crisis of 2008, there were a lot of factors that influenced the real estate meltdown. In this post I will be focusing on the excess Supply that was created during that time, and how it relates to today’s market.
According to the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB), from 2003 through 2007, the United States needed roughly 1.2 million new homes a year to satisfy the Demand for new housing at the time.
During that same time period, new home builders created a “Supply,” like never before, building over 2 million new homes per year.
It was over-building at its best. The new home Supply outpaced the Demand by more than 800,000 units per year, for five consecutive years, ultimately leading to an over-supply of 4.32 million homes!
That’s 4.32 million EXTRA homes – with almost no one to buy them.
Contrast that with today.
According to NAR, right now we have the exact opposite situation. Based on population growth over the last ten years, millennials coming into their peak spending years, and the increased number of family units, we now have a 5-6 million new home shortage.
In addition to this massive shortage, let’s talk about homes “For Sale” and the average time to sell a home in the two contrasting time periods.
From 2008-2014, inventory levels were at an all-time high. It took an average of 486 days to sell a home. Today, inventory levels are at historic lows, and the national average is 17 days to sell a home. Based on data in our select markets, we’re even seeing less than 7 days from listing to sale.
Quite a bit different than 2008, wouldn’t you say?
In fact, it has been the most violent and radical shift in real estate Supply and Demand…in any decade on record.
So…
Given the current Supply and Demand situation, it couldn’t possibly be any more “Un-Bubble” like than it is today.
5 MILLION - Just to Balance Things Out
And, at the risk of flogging a dead horse, our friends at the National Association of Realtors tell us that if we had 5 million MORE new homes today, they would all be absorbed, and sold within 30-60 days!
Does that sound anything like 2008-2014?
Now, don’t get me wrong.
Higher interest rates are going to slow things down and hopefully help get inflation under control. And yes, there are larger macro issues to be keeping a close eye on, like employment and the overall economy.
After all, if people don’t have jobs, they can’t pay for houses.
However, all things considered, today’s real estate market doesn’t look anything like 2008-2014. In fact, if you “follow the money” you’ll see that real estate is one of the strongest asset classes on the planet right now.
Like Mark Twain once said...
“Buy land, they’re not making it anymore.”
Substitute the word ‘homes’ for ‘land’ and you’ll have a good idea of the biggest issue facing the U.S. housing market. Again, Supply and Demand is one of the most fundamental laws of economics, and right now we have a very serious lack of Supply.
In future posts we’ll be covering other important topics like home affordability, rising interest rates, and how you need to adjust your budgets and plans to mitigate risk and maximize profits.
Now go forth and BUILD!
…our country, our economy, and our world needs you!
All the best,
David Huey, CEO
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