Better Economy Because of Increasing Prices? Let's have a REALTY Check!
New home prices are coming down, and that’s key to the growth of new home sales. And we’ve seen that this last month. New home sales are spiking, and the size of the house they’re building is shrinking. And with that, the price is coming down. They’re building more houses for the people that need it right now. They’re meeting demand.
Here’s the historical data for the mortgage credit availability index. The higher that index the easier it was to get a mortgage. We can see that the number all the way to the right is getting better over the last couple of years. It’s beginning to get easier and easier to obtain a mortgage. But, we’re nowhere near the levels of 2004, 2005, and 2006, nowhere near those levels.
With prices still increasing, is another housing bubble form? Let’s take a look at this.
This is from the Freddie Mac home price index. This is houses compared to their pre-2008 peak. In at least 50% of the country right now, those that are in that orange color, they haven’t even reached the level they were eight years ago.
Prices would actually be a little bit higher right now than what they were. So, we’re at numbers right now that make sense. Now, if prices continue to increase dramatically, that 5-6% a year. The reason prices are rising is there’s not enough inventory to meet the demand. There’s not enough supply to meet the demand. And whenever, no matter what you’re selling, when demand is very strong and supply is low, prices will go up. Like what Core Logic said. “While today many other asset classes remain turbulent, real estate prices have been an oasis of stability, and they’re expected to remain stable in the short term due to very tight inventory of unsold homes and rising purchase demand.”
But, if we look at the real red flags, we look at the things that we could warn us that maybe we’re running into another challenge, all of those warning signs are saying, “Don’t worry.” To have it during the last cycle as a result of building too many homes and of speculation fueled by loose credit. That’s the opposite of what we have today. They build way too many homes back in 2004, 2005, 2006. We don’t have enough homes being built right now.
This is important because volatility is generally an indicator of risk. Just like the 1990s, a stable home price environment, is very good sign for the housing market and will help anchor the entire economy. Now let me say this - We are stable. Real Estate is THE stable asset class in our economy.