Markets – Buying vs. Renting
Here is your market update from Cypress Ventures Group.
Home values have surged dramatically. During the first four months in 2022 median home values have increased close to 7%. Compared to a year ago the rise is close to 15% and compared to April 2020 median home prices are close to 38% higher.
The questions to ask yourself are:
1: Is this a bubble? Will it burst?
2: What’s it mean for home ownership?
3: What’s causing it?
4: What do surging home prices mean to the apartment market?
Is this a bubble? Bubbles are generally driven by speculation. In the case of the last housing bubble, the underwriting was very lax. A key factor that helped create the last housing bubble leading up to the global financial crisis was the rate of construction. Between 2003 and 2010, 2.8 million more housing units were built than the number of households that were formed. There was a housing surplus, easy underwriting and speculation forced prices to reset. Comparatively, Since 2011, the U.S. has produced fewer housing units, creating a housing shortage.
We have effectively run out of affordable housing units. That has created pent-up demand.
There is only a 2.1 month supply of houses on the market and in addition, apartment vacancy rates are at a record low of 2.4%. Even though the number of households should be surging, there are not enough housing units to allow people to move out on their own and that is driving the housing market, home prices and rents.
This situation is much different than it was before the last housing bubble. Rather than a housing surplus with loose underwriting we have a housing shortage with very sound underwrting. That tells us that we are not in a housing bubble.
Home ownership is heading out of reach for many. From 2009 to 2015 about 50% of U.S. households had sufficient income to qualify for a mortgage on a median-priced home. As prices went up that percentage shrunk. About two years ago households had to earn about $73,000 to qualify for a median-priced home. About 45% of U.S. households could make that hurdle. In April, buyers needed over $113,000 of income to qualify for the mortgage on a median-priced home. Now, only about 26% of households can qualify. As interest rates rise that number will shrink.
In January the average 30-year mortgage rate was 3.45%. In April it was 4.98% and in May, it was about 5.23%. In early July, Freddie Mac reports the rate was 5.30%. A drop from the previous week but still on the rise. Rates will most likely continue to rise as the Fed battles inflation.
Over the short term, until more housing units are built and housing supply and demand move back towards a balance, apartment demand will remain very strong. Apartment rents are a lot more affordable than home ownership right now. Currently apartment rent is $638 LOWER than the payment on a median-priced home. Even though the average apartment rents have gone up about 16% since 2020 or about 8% per year, that’s less than half as fast as mortgage rate increases.
The pent-up demand for new households driven by the pandemic, demographics, and housing shortages will continue to keep apartment vacancy rates very low and push rents higher. This will continue to drive capital into the apartment sector and drive aggressive bidding for properties, despite rising interest rates.
The housing supply shortage will remain a major consideration for investors who keep their eyes on the horizon.
~ Info from Marcus & Millichap
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