U.S. Housing Market: Not Hot Everywhere

us housing market

Zillow just reported that the U.S. Housing Market is up 49% overall since 2012. That’s roughly 6% per year in that time period-though, to be fair, 2012 was when the housing market hit bottom after the 2008-2009 financial crisis. The U.S. Housing Market is huge- $33 trillion (“T”). It’s larger than the value of all U.S. stocks and is about equal to the Gross Domestic Products (GDPs) of the U.S. ($19T), China ($12T) and Canada ($2T). Commercial real estate, including retail, hotels, office buildings, apartment buildings and industrial is about $6T.

The U.S. housing market has had some big winners and some big losers in the last 7 years. Almost 1/3 of the gain of $11T since 2012 has occurred in California. Four of the country’s 10 most valuable markets are in California; LA (5% increase in value in 2018), San Francisco (9.6% increase), San Jose (10% increase) and San Diego (3% increase). New York Metro itself has $3T of housing. The Washington, D.C. metro housing is worth $900 billion. DC itself has more housing value than 40 states, including Colorado, Arizona, Ohio and Oregon.

Unfortunately, housing in some areas hasn’t done so well. Illinois has many state-specific issues which makes it one of the worst housing markets areas. In fact, among the nation’s top 100 metro areas, Chicago is expected to be the weakest housing market of them all in 2019. With mortgage interest rates possibly causing a likely national homes sales slowdown of 2% in the U.S. in 2019, Chicago metro, including Naperville and Elgin, is expected to have an 8% decline in home sales this year. Taxes are a big problem in Illinois. Illinois homeowners are subject to the highest overall tax burden in the country, including the second highest property taxes in the U.S. Since 1996, Illinois property taxes have grown 43% faster than home values and 76% faster than home values in Cook County (Chicago). Worse yet, less than 50% of the tax increases have gone to pay for services. Most of the increase has gone for teacher and other governmental pensions and debt service on bonds.

In 2017, Illinois raised income taxes- the largest permanent state hike in history. Add in a sluggish state economy and outbound migration and the Illinois housing market is hurting. Even so, the Illinois Association of Realtors expects the median value of houses in IL to rise in 2019 by 4%, to roughly $196,000 for the state and $241,000 for Chicago.

The Lowcountry in SC is faring much better. Charleston Metro is now home to 700,000 people. Ongoing job growth means continued housing demand. The median home value in Charleston is now about $320,000 and Charleston home values went up 8% in 2018. The forecast for 2019 is 3% growth. Buyers outnumber sellers. A typical home in Charleston receives only one offer. However, homes sell for only 3% less of the listing price on average with 73 days on the market.

Charleston has many reasons for its housing growth:

  • A booming job market with an unemployment rate under 3% and one of the least unionized states in the nation
  • Wages are low
  • South Carolina’s overall tax burden is among the lowest, particularly for retirees.
  • Huge Tourism industry including being the most sought after wedding destination in the country
  • Home Appreciation is strong- 31% over the last 10 years

Overall, the U.S. Housing market is strong for now. Many winners, but some losers. Mortgage rates, after jumping to 5% and more on 30 year mortgages just a few months ago, are now down in the low 4% range. If they stay there, 2019 could be a pretty good year again for the U.S. Housing Market. But, with many areas coming off a strong run overall the last several years, a cool-down on housing prices wouldn’t be surprising. We’ll continue to watch how the events unfold and keep our clients and readers informed as conditions warrant.

Housing is Hot: Time to Jump in?

dream houseHouse prices rose 9.3% in the 12 months ended February 2013. So says the Case-Shiller 20-City Composite. This was the highest growth rate since 2006. Some communities are seeing double digit gains; particularly those hardest hit earlier. Phoenix had a 23% twelve-month increase, San Francisco 19%, Las Vegas 18% and Atlanta 17%. Inventories of available homes are dropping- to less than three months supply in some of the hottest markets.

Certainly, the Fed has had a big hand in the recovery. Lower interest rates have made housing comparatively a more attractive asset. And, lower mortgage rates have created urgency for buyers. They want to own a home for many financial reasons, the most important of which, according to a recent Gallup poll is the hope to make a “good investment that appreciates in value.”

Yet, despite the recent run-up in prices, Robert Shiller, co-creator of the Case-Shiller Index, remains cautious about the long-term investment value of houses.

Over the last 100 years, house prices have increased only 0.2% per year, in real terms (after subtracting inflation). Yes, of course, house prices continue to rise. If inflation continues at the current 2.5% rate, a home selling for $400,000 today might sell for around $500,000 in ten years. Even though the price is up, the real value (in terms of purchasing power) is unchanged. Investing in housing is not like investing in stocks. Successful businesses should grow over time and so should their stock prices. Housing, on the other hand, declines over time, unless the owner pays for maintenance and improvements.

Furthermore, Dr. Shiller believes that the Fed’s quantitative easing (“QE”) has produced a “totally artificial real estate economy.” What would happen if 30 year fixed interest rates were 6% instead of 3.5%? Buyers would have their purchasing power reduced significantly. At today’s rates, $1,800 per month would cover principal and interest on a $400,000 mortgage. If rates were 6%, the same $1,800 would only fund a $300,000 mortgage. Assuming that individual had $100,000 as a down payment and rates were 6% instead of 3.5%, they could only afford a $400,000 house instead of one that was $500,000.

In addition, economic and demographic changes may severely impair the value of the house when it is time to sell. In the 19th century, housing was built near factories and warehouses. In the early 20th century, houses were built around streetcar routes. The suburbs started to boom in the 1950s when the Interstate Highway system came. Today, there is a trend toward walk-able urban areas and away from distant suburbs. In addition, aging baby boomers are creating demand for more continuing care retirement communities. So, the value of your house ten or twenty years may be impacted not only by inflation and mortgage interest rates but also whether your house is still fashionable. As Dr. Shiller points out: “Today’s dream house may not be tomorrow’s.”

There are many good reasons to buy a house. Most people live in their house for many years to build equity, receive tax deducations, and to live the American dream. That’s wonderful. Now may be the best time to act and lock in an ultra low mortgage.

However, for those of you considering buying principally because your house will be a “good investment that appreciates in value”, you may want to think again. History and changing economic and demographic conditions aren’t on your side.