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Housing headwinds put a pinch on buyers

The San Francisco-based Trulia, an online resource for homebuyers, recently published a report on renting versus buying a home that suggests the sharp rise in home values and rising mortgage interest rates have made homebuying less financially appealing than in recent years. Cheryl Young, Trulia’s senior economist, discussed that study and a range of issues that affect the housing market.

Are you concerned with the rapid rise in prices?

cherylyoungYes. Obviously, rising prices definitely adds another strong headwind for consumers. And if you are talking about the general health of the housing market, rising home prices is something to give us pause. However,  I don’t think we are as concerned [about a downturn or housing bubble] as we should have been back in 2007 or 2006, mainly because, if we look at what is happening now, we see that the demand for housing and the rising home prices is really a function of strong market fundamentals. We see really strong demand, low unemployment, decent job growth. So, things are going pretty well for the consumer. And, of course, we are in an era of low inventories. Because there is not much supply out there, we have seen prices go up. If we look back, pre-recession, we saw a lot of housing demand fueled by exuberance and speculation.

How affordable are homes relative to a normal market?

The guideline from HUD [U.S. Department of Housing and Urban Development] and others is that you really shouldn’t be spending more than 30 percent of your income on house payments, rents or mortgage payments. Right now, in terms of that percent, we saw in the last quarter of 2018,  that people would be spending about 28.4 percent of their income, which has been going up for the past several years. That is up 2.2 percentage points from Q2 2017.  So, it is getting less and less affordable and, in some places, relative affordability is really, really low. If you bought [a home] in San Francisco, it is almost 66 percent [of income spent on housing]. That’s an almost shockingly high amount. New York is around 65 percent and Los Angeles around 59. So, it is really unaffordable in some markets, for sure. Nationally, [the market] is still within the guidelines, but getting closer and closer to what we would call unaffordable.

Your recent study on renting versus buying a home suggests that homeownership appears to have lost some of its financial appeal. On a national basis, however, does it still makes a lot more financial sense to buy a home than rent?

Yes. So, nationally, we did find that it is 26.3 percent cheaper to buy than rent. Those are based on a few assumptions. One is that you are going to be staying in your home, whether you are renting or buying, for seven years. We are seeing people stay in their homes maybe a little longer, but seven years seems reasonable. [The study] assumes a 30-year fixed (rate) mortgage, 20 percent downpayment, and what you are going to be paying for (homeowners) insurance and property tax. The 26.3 percent cheaper-to-buy [figure] obviously tips the scales in favor of buying, but that is down since we started reporting this in the last five years. There are a lot of factors. Obviously, mortgage rates are going up. That is going to tip the scales a little bit toward renting, but also home-value appreciation is far outpacing rent growth right now.  So, rents are pretty much cooling out. As they cool down and home prices track up, that margin between buying and renting starts closing.   

You have reported that renting is now a better deal financially in two California markets — San Jose and San Francisco — given their high home values and relatively flat rents. Do you expect more cities to go this way?

There are markets that are always close to that margin and things that could tip it. If mortgage rates were to rise and we still see rents flattening — and even decreasing — as they have been in some places relative to rising home prices, we may see some markets tip. Those are some places we have been keeping an eye on. Honolulu is almost there. You may see some other places tip in favor of renting.

Are you seeing any evidence that the inventory crunch is easing at all, either through more existing home listings or new-home starts?

I would probably start by saying it doesn’t seem like the inventory woes are going to be over anytime soon, but there are a couple of data points that give us a glimmer of hope. If you are talking about new construction, 2017 was really the best year for housing starts since 2007. So, that is really promising news. Obviously, it is going to take some time for those properties to go on the market, but that was promising. And we do see permitting up in some places, where there is a lot of building going on. In terms of looking at available listings, inventory has been tracking down. Our inventory report did see a decline in inventory (in second-quarter 2018) year over year. But what we did see — which we don’t typically see — is that the second quarter of 2018 saw a bit of a spike from the first quarter. Usually, it might go up a little bit because we are starting to go into the homebuying season from Q1 to Q2. We saw a spike of about 12.2 percent. The previous year it was around 3 percent. Obviously, while that doesn’t make a trend, we are seeing things that might indicate that there could be some relief in sight.

Have you estimated the amount of supply that’s needed to match the demand right now?

We don’t have a number for that, per se. Supply is the main plot line of the housing market these days. With the supply question, there is, how much do we need to build, and then, how long will it take us to actually build that? We do know we have been undersupplying housing since the [Great] Recession. Housing was a risky investment after the recession and we lost a lot of people in construction labor permanently. They left that sector because there was very little going on. So, after almost a decade of undersupplying housing, we are trying to catch up now. There are a lot of supply issues that are regional. In the Bay Area, for example, we are severely undersupplying housing. We have a very strong job market right now, but actually constructing a home with land-use regulations and stuff like that is a very complicated process. There is also a lot of on-the-ground opposition to new construction. So, I am actually more concerned about how, practically, we are going to build all the houses we need to build where we need to build them.

The economy is doing well. Do you believe the housing market will continue to thrive?

There is certainly the demand. It is amazing that people haven’t been as deterred as they might be, because of the rising home prices and just scarce inventory. The demand is certainly there. Really, what is holding back the potential for a lot more sales is the inventory issue. This year, the economy is doing well and there are people who have been saying that there is only so long that we can have this economic expansion.  There may be some pullback in the economy within the next couple of years. I don’t know when that is going to happen. At least through 2018, I think, people are looking to buy a home and are not going to be deterred by some of the headwinds that a lot of consumers are facing as they home search. They have been looking for a while. They are really intent on buying a home. So, I think it is going to be another strong year, but I don’t know how much longer that is going to last. 


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