(Bloomberg Opinion) -- The National Association of Realtors came out Thursday with its monthly update on housing, and the results were stunning. The median price of an existing home in the U.S. rose to a record $329,100 in March, an increase of 5.92% from February and 17.2% from a year earlier.
The unlikely strength of the housing market during a pandemic has been no secret. And yet the report provoked responses along the lines of “unsustainable” and “bubble” because there seems to be no slowing down. A bubble, however, is driven by a surge in asset prices that is fueled by irrational behavior and disconnected from fundamentals. By that measure, what is happening in housing today is the opposite of a bubble and should help drive the economy for many quarters, if not years.
With the widespread damage from the subprime mortgage fiasco a little more than a decade ago still a fresh memory, it’s understandable that many are warning against the potential for excesses in housing today. It’s common to hear reports of bidding wars and houses being snapped up sight unseen within hours of coming up for sale. On average, properties remained on the market for a record low 18 days in March, according to the NAR.
Unlike the period heading into the last housing crisis, the issue today is that there just aren’t enough homes to go around. The NAR says there is just 2.1 months of supply, or available homes for sale, essentially a record low and down from 9.6 months heading into 2008. Builders can’t put up houses fast enough; their supply also stands at a record low, right around 3.6 months, compared with 9.6 months at the end of 2007. (Limited supply is one reason existing home sales fell to a seven-month low in March.)
And it’s not as if buyers are stretching their finances to get into a home despite the rapidly rising prices. An NAR measure of affordability has been remarkably stable, hanging far closer to the highs set in 2012 and 2013 than the recent lows in 2006.
Another way to look at this is through the lens of household finances. Household balance sheets are in pristine condition. Debt as a percentage of personal income has dropped to 85.3% from a peak of 117.1% in 2009, according to the Federal Reserve. The ratio of total required mortgage service payments to total disposable income has plummeted to 3.97 from the high of 7.21 in 2007.
Sure, inventory levels can change quickly, as we saw between 2005 and 2007, and no doubt sellers will test the market later this year as the pandemic eases. But there is little reason to worry about the current situation reversing anytime soon to the point where supply overwhelms demand. As Bill McBride, who runs the Calculated Risk blog and called the last housing crash, has noted to readers, demographics are about to become a huge tailwind for housing.
The key is the 30- to 39-year-old age group. Those in this bracket make up the bulk of first-time home buyers, and as McBride pointed out, their numbers will “increase significantly” over the next decade based on Bureau of Labor Statistics data, rising from about 45 million now to 48 million by 2030. Here’s how McBride put it:
“The generation moving into the home buying years is much larger than the leading edge of the boomers that will be downsizing - or moving into retirement communities.”
A strong housing market can kick off a virtuous circle in the economy. Consumers watching the value of their homes increase would feel more confident. That confidence would translate into increased consumer spending, which accounts for two-thirds of gross domestic product. Those holding a mortgage saw their equity rise by 16.2% in the fourth quarter from a year earlier, the biggest annual gain since 2013, according to CoreLogic Inc., adding $1.5 trillion to aggregate wealth. Looked at another way, more than 30% of homeowners were considered equity rich at the end of last year, meaning their property was worth twice as much as the underlying mortgage.
Given that household balance sheets are in strong shape, consumers have no qualms about tapping some of that equity while still being prudent. Although homeowners withdrew $188 billion of equity last year, the median was just $6,700, according to the Federal Reserve Bank of New York.
The hot housing market will eventually cool as supply catches up to demand, but in no way does the data support the idea that a bubble has formed that will inflict widespread damage like the crash 13 years ago that almost brought the global financial system to its knees. That one was fueled by Wall Street, which generated huge profits from financing as many mortgages as possible, turning them into securities and creating high-risk derivatives tied to the loans. Financial regulations put in place since then have prevented a repeat of such practices, meaning this housing market is built on a solid foundation rather than a lot of hot air.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
©2021 Bloomberg L.P.