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Seller's housing market could have long legs

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?

homesellPrice 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 real problem?

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 near future?

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.  


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