Values Up, Ownership Down

Housing trends set in motion by ‘The Great Recession‘ continue. They’re worth a revisit.  Let’s take a look at:

• Home Ownership Rates
• Home Values
• New Home Construction

Why you should care:   In my opinion, home values – in high demand areas – will continue to rise.  Probably at an accelerating rate.

Everyone on the planet needs three things:  Food, shelter and clothing.   Well, I guess there are places where clothing is optional.    Whether one owns or rents, housing is of critical importance to us all.

Trends tend to continue.   Momentum carries them forward.  I talked about this extensively in this BLOG post:  https://terryliebman.wordpress.com/2016/05/14/the-physics-of-economics-part-1/

Taking action:   Consider the implications of this opinion as you make housing choices.

THE BLOG:   The national home ownership rate fell to 63.5 percent in 2016: Q1.  This is a 30-year low.   Take a look at the chart (click to enlarge):

Ownership rates peaked in 2004-2006, when the rate was consistently above 69%.   Per the Census Bureau, at the end of 2015 we had about 125 million ‘households’ in the US.   Each household has an average of 2.5 people.  Converting this percentage difference – about 5.5% – into numbers, today we have almost 7 million more renters today than in 2006.

From a ‘supply/demand’ perspective, this would suggest home values must be lower as demand is lower.   But nothing could be further from today’s reality.

Nationally, home values continue to rise.   Both Case-Shiller and the FHFA, the two most reliable sources, agree:  Values are up…way up.

But every sub-market is not the same.   For example, per the FHFA ‘HPI’ the 5-year home appreciation rate in Washington, Oregon and California (thru 2016: Q1) is 34.05%, 44.22%, and 53.65%, respectively.   Let me repeat:  California home values are up over 53% in the past 5 years.  On the other hand, 5-year appreciation rates have been about 14% in both Mississippi and Alabama.

This Case-Shiller chart shows some of wide variations by city:

You might be asking, “How can the price of homes be increasing in the face of declining demand?”    Well, it turns out while the ownership percentage is declining, demand is not.   A combination of increased population and smaller household size since 2010 have increased the number of households by almost 8.3 million.  (Per the CB, we had 116.7 million households in 2010.)   There’s your demand increase.

At the same time, new home construction is way down:

Since the CB first began tracking new home construction in 1964, we’ve never seen a construction lull as deep as we did in 2009 to 2013; and, even today – by historic standards – new home construction remains quite muted.

Which is odd since the US is creating about 1.4 million households each year.

We’re certainly not creating enough new homes – whether they be rental or owned.   Even ignoring the number of homes lost each year due to fire, flood, and age, if we added the same number as household growth, we’d be at equilibrium.

But we’re not.  And the problem is more exacerbated in high-demand areas.

There are dozens of metrics that impact and affect home values.   Interest rates, GDP growth, economic stability, wage growth, the employment rate…and the list goes on.   However, these all affect amplitude, not direction.

Today, direction is clear.   It’s definitely up.   And most of the amplitude impacting metrics seem to be lining up on the higher side, not lower.

Home values are rising across the US.   In high-demand areas, increases are even higher.   And the rate of increase is accelerating.

• Terry Liebman