A Macro View: Homing in on the Housing Market
Home prices in the US are continuing to climb, as reported earlier this week by the S&P Corelogic Case-Shiller Home Price Index (“Case-Shiller HPI”). The most-recent data represents the strongest increase in housing costs in nearly four years, as year-over-year prices increased 5.7%, raising the median house price across the U.S. to more than $230,000. What’s behind these numbers? Is it (a) low inventories, (b) changing demographics, (c) labor constraints, or (d) mortgage rates? Trick question. It’s (e) all of the above.
For the purpose of this Weekly Review, let’s separate the aforementioned housing dynamics into supply or demand, and begin with supply. Supply, or home inventory, in the housing market is composed of existing (previously owned) homes for sale, as well as new homes for purchase. The latter is often influenced by lot availability, which has decreased, as has the number of skilled workers, who build the homes. According to Bloomberg, although new homes for sale are at their highest level in eight years, there are still fewer new homes available for sale today than in 2007 (roughly 870,000 now vs 1.2 million in 2007). Historically lower new home inventory, coupled with lot and labor constraints, has pushed up prices for new homes for purchase. Augmenting a lack of total home inventory is the shortage of existing homes for sale. According to the National Association of Realtors, existing home sales declined 3.7% in February (roughly 400,000 now vs 1.0 million in 2007). Overall, home inventory is at its lowest level since 1999, when the National Association of Realtors began tracking the data.
On the other hand, the main determinant of the demand for housing is demographics, but also it can be influenced by cost, availability of credit, income, prices, et al. Currently, demographics and mortgage rates are the main drivers of housing demand. Regarding demographics, many studies have shown that home ownership by millennials (roughly defined as those currently between the ages of 18 and 35) is considered low at 35%, as compared to 41% of baby boomers who owned their homes in 1982 (when they were the same age). Recent data suggests that while millennials had been delaying home ownership, they finally may be ready to purchase their first home, which has stimulated current demand. A Morningstar report quantified these numbers, stating that housing demand should be strongly supported by the “80-million-strong generation of millennials” as they age into their 30s. As said generation looks to purchase their first homes, they will find historically low interest rates, with a current 30-year fixed mortgage rate averaging 4.20%, which pales in comparison to the average mortgage rate of 16% that baby boomers paid in 1982.
In summary, supply is currently low, as existing- and new-home inventory lags, and is exacerbated by a decline in lot and labor availability, whereas demand is increasing, as millennials enter the home ownership market, which is amplified by attractive mortgage rates. Recalling Economics 101 lectures reminds us that, generally speaking, low supply + high demand = higher prices, and that, in turn, helps explain the most recent Case-Shiller HPI data, and is the answer to our pop-quiz.
Download the full PDF
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2017 Envestnet. All rights reserved.