Housing analysts have offered different views recently about
whether the U.S. housing market is overvalued and could be headed for a fall. First American Chief Economist
Mark Fleming spoke with Scotsman Guide News about why he thinks the current
seller's market could last.
In the past you have said the market has been affordable
despite solid home-price increases. Do you still think that is the case?
Price levels are still lower than they were in the 2000s, 16
or 17 years ago, when you account for purchasing-power increases over time. What
we refer to as our real home-price index takes the nominal level of prices and
adjusts for the fact that people can buy more as their income goes up and can
buy more if interest rates go down. In a way, if your purchasing power in
housing increases by 2 percent and house prices increase by 4 percent, the real
increase to you is only 2 percent because you also gain purchasing power. What
we have seen in the last 15 years is significant gain in purchasing power
largely driven by the significant drop in interest rates. Even though nominal
house prices have risen 5 percent and 6 percent in recent years, purchasing
power has risen faster. So, in real terms, housing is actually less expensive.
Regionally, however, some studies suggest places like Idaho,
Oregon and some California cities and Texas cities are overvalued. Do you agree
that there are certain pockets where prices are beyond what is sustainable?
No. Using that idea of purchasing power of the adjusted
house-price level, the five most expensive markets that we track — these are
the highest real estate priced markets in the United States — are San Jose,
Riverside, LA [Los Angeles], Sacramento and San Francisco, all in California. The most
expensive, San Jose, is 15 percent more expensive than it was in the year
2000, and is 4.6 percent more expensive in just one month because of the
post-election bump in mortgage rates. That is still just 15 percent above the
year 2000, and it is well below the housing-boom peak. Many of these markets
have already surpassed the nominal price levels of the peak in 2006, but in
2006, mortgage rates were 6 percent. So, in real purchasing-power adjusted
terms, even the most expensive cities today aren’t necessarily highly expensive
in general terms.
Will the lack of supply create a
Unsustainable in terms of price levels is different than
being able to find a home to buy. A lack of inventory, I think, is clearly the
challenge many markets will face this coming spring homebuying season. It is
going to be a strong seller's market in 2017. There are some challenges,
if you consider who supplies the majority of the inventory. It is
actually existing homeowners. Existing homeowners are trying to decide whether
to bring their home to market, in part, based upon what they want to buy. It is
not about price escalation driving the decision. It is, I am worried that if I
sell my home, I am not going to find something that I like to buy. We are going
to see more first-time homebuyers. There is going to be higher demand from millennials.
They don’t own a home already, but they sure would like to buy that home from
that existing homeowner who doesn’t want to move.
Do you expect sales numbers to decline this year?
It is hard to say. We know from research that we have done
that when mortgage rates rise, it generally curtails sales activity a little
bit. The rising-rate environment that we expect should put a damper on existing
home sales. Then you have the resurgence of homeownership demand from
millennials that are the strongest that it has been in years, and will likely
be stronger years from now. You have these countervailing forces. What probably
seems to be the right level of home sales at the moment is somewhere around the
5.5 [million] to 5.6 million seasonally adjusted annual pace.
Do you see an end to the seller's market at any time in the
Not in the near future. We have the largest generation in
American history in the form of millennials aging into their prime homebuying
years. As they enter it into their early 30s, as they get married
and have children, there is a large demographic oncoming demand for
homeownership. It will be a very strong first-time homeownership market share.
That is not going to change for the next few years, and we are running tight
inventories. At the very least, this year for sure will be a seller's market.
Could things change for 2018? I suppose possibly, but it is also possible that
2018 could be a seller's market. You can’t have a permanent seller's market. It
is all cyclical. It all goes back and forth. So, at some point, it will have to
switch, but I am pretty certain that this year will be a seller's market.