The Mortgage Corner
Housing prices are rising too fast to be sustainable over the long term says CoreLogic, a leading global property information, analytics provider. So buyers should be aware such unsustainable price rises could lead us into another housing bubble.
CoreLogic just released its Home Price Index (HPI™) and HPI Forecast™ for February 2018, which shows home prices rose both year over year and month over month. Prices increased nationally year over year by 6.7 percent — from February 2017 to February 2018 — and on a month-over-month basis, home prices increased by a very large 1 percent in February 2018 — compared with January 2018 — according to the CoreLogic HPI.
“A number of western states have had hot housing markets,” said Dr. Frank Nothaft, chief economist for CoreLogic. “Idaho, Nevada, Utah and Washington all had home prices up more than 11 percent over the last year. With the recent rise in mortgage rates, affordability has fallen sharply in these states. We expect home-price growth to slow over the next 12 months, dropping to 5 to 6 percent in Idaho, Utah and Washington, and slowing to 9.6 percent in Nevada.”
Then why the expectation for a slowdown in price rises over the next year? Disposable personal income (after taxes) is rising just 2.5 percent per year, which means fewer households are even eligible to buy or refinance a home in this market. Corelogic is therefore signaling that some housing markets are becoming overvalued, which means values are rising10 percent higher than the “long-term sustainable level.”
According to CoreLogic Market Condition Indicators (MCI) data, an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 34 percent of metropolitan areas have an overvalued housing market as of February 2018. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).
And the Federal Reserve wants to continue to raise their interest rates. The Fed raised their overnight rate to between 1.5 to 1.75 percent last Wednesday. This is with rising new and existing-home sales, which is keeping inventory levels low. There is just a 3.2 months’ supply of existing homes for sale.
But the construction of single-family homes has picked up, which should ease some of the housing crunch. Econoday and the Commerce Department reported construction spending has been soft of late in the commercial sector, inching only 0.1 percent higher in February after posting no change in January, but gains are being posted for new single-family homes, up 0.9 percent for a second straight month and a year-on-year February increase of 9.5 percent. Multi-family homes, where spending has been weak, bounced back a monthly 1.2 percent for a yearly 0.9 percent increase.
In sum, the future of housing sales may be determined by household debt loads. Current debt loads are still low while still recovering from the Great Recession. The blue line in the above graph that dates back to 1980 is mortgage debt as a percentage of personal disposable income, and it has been declining, whereas the yellow line of other consumer debt, such as credit card and installment loans, has been rising. That may reflect the low mortgage rates, but also fewer household able to qualify for mortgages, even with still record-low interest rates.
Harlan Green © 2018
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