Housing: America’s Piggy Bank

National home prices rose a whopping 5.8% in the last 12 months. The S&P Core Logic Case Shiller Index stands at 192.60, well above the 182.10 level a year ago. A decade ago, the housing boom went bust. Buyers, speculators, flippers and virtually anyone with a pulse were buying at least one house: others were buying multiple homes for personal use and investment purposes. The ’05 to ’06 period became housing mania: prices, building, and sentiment soared creating a real estate bubble for the ages; then it burst. Home prices cascaded downward from peak to trough by over 35%, erasing $7 trillion in real estate value. Homeowner equity was cut from 61% to 43% in less than 3 years for those fortunate enough to still have equity remaining. Home buyers often found themselves in a debtor’s prison, owing more on their homes than they were worth. Making payments on a home worth less than a person paid was unheard of; hence, many with this predicament chose to walk away from the debt and had their houses repossessed. It was the worst of times, particularly for the middle class that essentially saw the majority of their net worth vanish.

Where are we now? According to the Case-Shiller report housing price gains continue apace. In June, home prices posted a 0.9% increase, equating to an additional $211 billion in housing market value. The total of housing stock in the U.S. is approximately $24 trillion. Skeptics are warning that the run up in values has been too fast and ripe for correction. They contend stretched asset prices, burgeoning public and private debt, unorthodox central bank methods, and restrained economic growth among other factors are headwinds to curb advances.

Optimists on the other hand portray a different scenario. Total U.S. employment fell to 129.8 million at the recession bottom; it has since risen to 146.6 million. That’s a positive swing of 16.8 million workers on payrolls that are willing and able to spend and invest their earnings; 2.2 million jobs have been added in the past 12 months. The previous glut in housing has reversed course and now there is a shortage. Home builders are reluctant to ramp up new home construction aggressively because they do not want to get caught with excess inventory if the market makes an abrupt shift. In the chart below housing starts remain 20% below their long term average and are half their ’05 to ’06 levels; yet, U.S. population has risen by 30 million since then. There’s talk about what higher interest rates will do to disrupt things, as the Fed continues to tighten. Considering 30 year mortgage rates at 3.86% are half their 25 year average that doesn’t seem alarming. Housing inventory is 7.1% lower than last year. Available housing inventory have fallen to 4.3 months compared to 4.6 months a year ago.

Lastly, the median existing home in the U.S. sells for $263,800, up from $247,600 in June 2016. Million dollar homes rose close to $60 grand. Dwellers can make up their own minds, but there are only two options: rent or buy. Oh, I forgot there is another option, live with someone else for free.