Home Prices Won’t Be Going Down Anytime Soon
Over the last decade since the beginning of the Great Recession in 2007, home prices have made a steady comeback. Home prices hit their low in the Spring of 2011, having dropped over 20% since their peak in January of 2007.
As the stock market makes a correction, one might ask, are we due for a correction in housing prices? I don’t believe so. A couple of things are occurring that should continue the demand for homes, resulting in steadily rising prices, albeit not at the rates seen in the last 7 years.
What drives home prices and the economy are Americans in the top half of the economic spectrum. These are the people who can afford a home, generate enough credit and income to secure a bank loan, and generally perceive home ownership as a measure of success. Nothing is universal, of course, but trends can drive change.
Millennials: Millennials have been slower than their parents to buy their first homes. They have also been slower to get married and have children, and those creating families are having smaller ones.
That being said, the last year or so has been a somewhat magical moment for Millennials in the home buying discussion. Millennials, the largest demographic segment in the country, were born in 1980/81. That means the oldest among them have just recently reached their mid-thirties. So, what’s so magical about that?
The upper half, economy-driving Millennials secured college educations and often graduate degrees, incurring substantial student loan debt in the process. The first Millennials graduated college in about 2002/03, and graduate school in 2005/6. Loaded with debt and newbie incomes, their income to debt ratios prevented them from qualifying for a home loan, even if they had wanted one, which most did not. Then 2007 hit, they watched their parents struggle with home ownership issues, and subsequent bank lending limitations made securing a loan more difficult.
Now, in 2018, and beginning a few years ago, those oldest Millennials have increased their incomes and paid down enough of their student loans, so that their debt to income ratios are now such that a bank will lend them money for a house. Plus, at long last, they are getting married and starting families. Both will drive them to buy homes. With two incomes, now often significant, they can afford a larger home than the starter home the Boomers first purchased.
Foreclosures and Bankruptcies: The disaster of the Great Recession forced a significant number of middle to high-income homeowners to file personal bankruptcy, sell in a short sale, or have their homes foreclosed on. All of these negatively affected their credit. Others held on for dear life.
Foreclosures and bankruptcies began rising after 2007 and hit their peak in 2011. These blemishes on credit last seven years. In 2018, all the folks who endured these embarrassments prior to 2011, have or will see them fall off their credit reports, resulting in significant increases in their credit scores. What will that allow them to do? Buy a home.
Investor Market is Over: As seen recently with the stock market, be prepared to see investors begin to take profits from those homes they purchased in short sales, foreclosures and out of bankruptcy, most of which they have been renting over the years. As interest rates rise, home price increases slow, the returns on investment will level off or fall, making rental investment properties less profitable. Some may simply sell to their tenants.
Millennials and those recovering from credit hits, are entering or returning to the home-buying market. While the credit-recovery group will be a relatively short-term boost, Millennials will continue entering the home-buying market for the next 15 years or so.
As investors take profits and sell, new home construction increases, and the oldest Boomers (now 72/73) begin to sell, all adding supply rather slowly, all counteracted by increasing mortgage interest rates, home price increases should be gradual. This demand should result in a healthy residential industry for many years to come.