House price appreciation is now at 1.3% above the housing boom peak in 2006, according to DataTree by First American. In late August 2018 unadjusted home prices nationwide were 7.3% higher than a year ago. Although the U.S. economy has shown some signs of weakening it continues to perform well, and it is reaching record levels. Some are beginning to wonder when it will end.
The housing market, as we know, was a critical fact in the Great Recession. It is rational to ask if history is about to repeat itself. The simple answer is probably not because the housing market today is significantly different from the housing boom preceding the Great Recession.
What’s So Different?
During the mid-2000s price appreciation was a result of high demand fueled by broader access to mortgage financing. Mortgage money being given on anticipated increased income was one of the practices at that time. What is generating price appreciation in the housing market today is low inventory. One can see that demand is outpacing supply by simple analysis. Multiple offers and bidding wars on homes can only be sustained when there is a shortage of homes available for sale, and there is a high demand for homes. In most markets in the United States homes are selling quickly after receiving multiple offers. This leads to offers being made above the asking price for a home and therefore price appreciation.
House-Buying Power Higher Today than in the Mid-2000s
House-buying power, how much house a consumer can afford, based on a 30-year fixed rate mortgage and household income, is above the peak in the housing boom that ended in 2006. It is 55% higher and unadjusted home prices are 1.3% above the height of the housing boom in 2006. House buying power has increased due to a slow and steady household income growth, and a declining mortgage rate environment. People do not really buy homes based on the price of the home but on the cost of the monthly mortgage payment. Higher wages and lower mortgage rates mean that consumers can afford more and this is a primary factor in home price appreciation. It has been known for years that there are cycles to real estate markets. Those cycles do not always lead to a bust.
Have we reached a Tipping Point for House Price Appreciation?
Right now we seem to be entering a cooling period. Buyers are struggling to find homes that they can afford, due to low inventory more than price appreciation. With little for sale on the market, some buyers have suspended their search.
Simple economics suggest that if supply stays constant and demand lowers, then sellers will lower prices to attract buyers. Homes are still appreciating in value nation-wide just at a slower rate than in prior months. The underlying factors of low mortgage rates, demand exceeding supply, and a strong U.S. economy have not changed. This would, “support a natural moderation of house prices rather than a sharp decline.”