The Biggest Risk to the Housing Market

Logan Mohtashami, one of my favorite economists writes for the Housing Wire every week. Here are some bullet points from his lengthy report—
· More Americans are buying homes with a mortgage in 2020 and 2021 than any single year from 2008-2019. Why? Millions of Millennials are entering their 30’s their peak home buying years.
· When interest rates rose in 2014 and 2018 the number of home sales slowed; but home prices still rose.
· Higher rates impact new home builders the most. And if their months of supply goes much higher than it is today, they will reduce the number of new homes they are building. This supports higher home prices for both new homes and existing homes.
· The biggest risk Logan sees is home prices are rising too fast. He points out that housing inventory nationally has been falling since 2014 and demand as measured by mortgage purchase applications has been rising since 2014. At the beginning of 2014 NAR reports that we had about 1.85 million homes for sale. Now we have less than 1.29 million. This puts months of inventory nationally at 2.6 months. Supply has shrunk by about 30%. The mortgage purchase application index has also risen by about 40% since 2014. Thus, home prices are rising too fast.
· Logan says for home price increases to cool we need inventory levels to increase by 35% to 75% as he doesn’t expect demand to soften.
· But, Logan offers no reasons why housing inventory levels will increase. I can’t come up with any good plausible reason either.

I will end with these 2 thoughts for you. First, remember home prices can increase 4 to 5 times faster than wages do. Thus, wage increases of 5% can easily support price increases of 20% to 25%. Second, here in Denver especially thousands of home buyers monthly are buying new existing homes and putting $200k or more down from the equity in their current home. Thus, homes are still affordable for a majority of them.