Fundamentals Accelerating Home Values In 2018

The following is a repost of an article originally published by Josh Mettle, one of our sponsors at Fairway Mortgage Company.  They have helped many of our readers with their home loans. The original article can be found on their website.  Readers note, this is a relatively long article!

Many of our clients are asking where home values are likely to go from here.  Is the real estate market ready to take a breather, or worse, are we entering another bubble?

With home prices nationally above or near all time highs, it’s rational to exercise caution and pause before making a decision to enter the housing market; or making the decision to sell and move up to your dream home. Before we prognosticate the future, let’s take a look how we ended 2017 for some perspective.

These three year-end stats tell me a lot about demand and future supply:

  1. New home sales are at the highest level in a decade but only about half what they were before the Great Recession. Builders sold homes faster than they can obtain permits, qualified laborers, and supplies to build new homes in 2017.
  2. Sales of existing homes are at the highest level in more than a decade. Demand for housing continues to outpace supply, multiple offer situations will likely continue.
  3. New single family home permits and starts advanced to the fastest pace since August 2007. Builders are trying to catch up to demand. City and county permitting, labor and supply shortages will likely continue to dampen the pace of new home construction and sales.

The graph below shows new home sales through November 2017. Sales of new homes jumped to an annual rate of 733k in November, which was the strongest number since July 2007, yet nearly half the all time high number set before the crash.

We are just now getting back to the average new home sales numbers going back to the 1960s after spending nearly a decade well below the average of approximately 600k per year.

As builders and new home sales try to keep pace with demand, existing home sales inventory is hitting the lowest levels since 2014. Note the average inventory of existing home sales since 2014 is about 4.8 months supply. As of December 2017 inventory is 29% lower than it has averaged over the 2014 to 2016 period.

A 3.4 month supply of existing homes, means that if no additional homes were listed for sale, all currently listed existing homes across the U.S. would be sold in approximately 3.4 months.

Historically a 6 months supply is considered a healthily balanced market. Leading into the Mortgage Meltdown and Great Recession inventory numbers were double digit in many areas of the country. We are a long, long way from the over supply that lead to the Great Recession and Mortgage Meltdown.

What was the result of a growing economy, new home construction not keeping up with demand, and historically low inventory in 2017? You guessed it; real estate appreciation significantly outpaced forecasts in most areas of the country.

You will find the most recent year over year change in sales price by state through month end November 2017 below. You can see the West Coast areas all appreciating rapidly as low unemployment rates and demand for housing is prolifically strong.

Thanks for putting up with all the statistics. I’m hoping that I have not bored you half to death. I think the real question most clients are asking themselves is, whether or not another real estate bubble is imminent.

Most bubbles start based on fundamentals, accelerate with speculation, and eventually pop due to loose credit standards (leverage). We certainly saw all three during the last housing crash.

It all started by wanting a piece of the American Dream of home ownership, and that worked out so well, why not have two or three homes. With the advent of the NINJA (no income, no job, no assets) loan things got really out of control.

Let’s compare the appreciation rates leading into the Great Recession and over the last four years. We’ve certainly seen healthy appreciation nationwide but nothing near what we saw in the four years before the crash. Keep in mind these numbers below come from Freddie Mac and the chart above comes from CoreLogic so their numbers are slightly different.

Finally let’s look at speculation. In 2005, twenty three percent of home sales were to “real estate investors” (speculators). In and of itself that is not a problem, however most of these loans did not require documented income, high credit scores, and or significant investment and down payment from the investor. Basically the investor was speculating with the bank’s money. If the market went up they won big, if it went down they lost little.

Today is a different story, only thirteen percent of homes sold in 2017 were sold as investment properties. I can tell you from personal experience; the vast majorities of those sales were either cash sales or with financing that required twenty to twenty five percent down payments.

Credit standards today are also completely different. Mortgage loans require income and asset documentation (down payment cannot come from a credit card these days), as well as high credit standards. Buyers today are legit buyers; this is not fake demand with excessive bank provided leverage.

Let’s not forget the potential effect of Tax Reform on housing. I would argue the tax reform benefits for consumers and corporations have already largely been baked into current stock market valuations. Just look at the stretched PE ratios on the S&P 500. Home values on the other hand, have not seen the benefit of the Tax Reform legislation as of yet. Check out my article on Tax Reform and its potential impact on housing for more information.

In summary, I believe demand will stay strong for housing throughout 2018 – fueled by low unemployment and strong consumer sentiment. Supply of both existing and new home sales will remain well below the 6 months supply balance level and thus will remain a sellers market with demand exceeding supply. With strong demand and limited supply, appreciation should remain hot throughout 2018.

So how do we help clients deal with this uber competitive real estate market?

We provide them with two incredible tools that give them an unfair advantage when searching for a home and negotiating their offers.

Our goal is simple; we aim to provide financing that can close as fast as a cash transaction. We believe that is paramount to compete and beat out other offers in 2018.

For example; in December of 2017 our team had the honor of serving 76 families across the country. Of those 76 families we served, 45 of them were clear to close in under 17 days, and 15 of them were clear to close in 10 days or less.

For our clients that go all the way through our full credit and income approval process prior to writing an offer, we even guarantee we will close in 17 days or less. There are some conditions that apply.

Lastly we’ve discovered that Zillow, Trulia, and are not real estate companies and they do NOT have live access to the MLS (Multiple Listing Service) like Realtors do. We think this is unfair and puts clients at a distinct disadvantage.

We’ve overcome this challenge by providing our clients with a mobile app called HomeScout. This app has many of the same user friendly mobile features, but unlike Zillow, has one hundred percent live access to the multiple listing services and allows clients to search for homes with the exact same power and information that Realtors do.

Why waste forty seven percent of your time looking at homes on Zillow? We’ve found that up to forty percent of their data is outdated and erroneous. Why let Zillow sell your private contact information to droves of agents and loan officers so they can prospect you endlessly? There is a better way to search for a home.

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