By: Dividend Sensei
Many people remember the epic housing bubble the the early 2000’s, which was a primary cause of the financial crisis. And while true that historically home prices generally don’t rise much over the rate of inflation over the past seven years home prices have once more risen at rates that have some fearing another housing bubble might be upon us. Let’s take a look at why that’s likely not the case, specifically why this time rising home prices are not the result of dangerous Wall Street gambling, but pure fundamentals and important secular economic trends. More importantly find out how you might be able to use rising home prices to potentially fund the retirement of your dreams.
4 Reasons We’re Not In A Housing Bubble And House Prices Are Likely To Keep Rising For Years
Now it should be noted that residential real estate is intensely local, so what we’re talking about here is aggregate nationwide data. However nationwide home prices, as measured by the S&P CoreLogic/Case Shiller national index peaked at 173 in April of 2016. The latest data (measuring April prices) stands at 170. Close enough to its former lofty levels to make many wonder if we’re now due for another housing crash.
However the housing bubble of the early 2000’s was marked by rampant speculation. That was both by regular people becoming house flippers (such as gardners with three or more houses), and Wall Street, whose subprime and NINJA (no job, no income, no assets) loans made such risky home buying possible. This time we’re seeing rising home prices (about 7% per year) due to four fundamental reasons, none of which are to do with speculation.
First the supply of new homes fell off a cliff during the financial crisis. For example during the height of the speculative new housing starts hit 2.3 million (annual rate). By April of 2009 that fell to 478,000. While new housing construction has steadily trended up during the second longest economic expansion in history today America is on track to build just 1.35 million new homes over the coming year.
However that figure might actually be too optimistic. According to the National Association of Home Builders only 900,000 new homes will be built in 2018. That’s compared to the 1.35 million needed just to keep up with population growth and replenish older homes as they deteriorate and need to be replaced. In other words, depending on whose data you use, we are now either building just enough new supply to keep up with population growth, or potentially up to 400,000 fewer homes than we need. But insufficient supply is just one part of the rising house price equation. The other is soaring demand.
According to S&P CoreLogic, in the top 20 housing markets 41% of renters want to buy a home compared to just 11% of homeowners looking to sell. This means that in America’s largest home markets the number of potential buyers (demand) is almost four times the amount of sellers (supply). What’s behind that? Well Millennials have started to recover from the financial crisis which struck just as millions were entering the job market.
After years of paying down student loans and toiling through stagnant wage growth off depressed starting salaries, the stronger economy has allowed more younger Americans than ever to find better job (quit rate has been rising steadily during recovery). Now Millennials are looking to start families and finally get out of their apartments (or their parents basements). According to a study by UBS Millennials (age 21 to 35 currently) are starting to enter the peak earnings growth years, and by 2020 are likely to become the richest generation in US history thanks to increasingly inheriting wealth from their Baby Boomer parents (the current richest generation in history).
This naturally will lead to massive demand for homes. And not just starter homes either. Increasingly Millennials are showing a desire to skip a low priced small home that’s just big enough for their needs, and use their high savings rates (three times bigger than Boomers) for down payments on larger homes. In other words after years of feeling poor millions of more higher earning individuals are now looking to finally buy a home to show “they’ve arrived”.