Housing prices have gone up 260% since 1995. It’s the single biggest cost for most Americans. To afford a home, millennials are saving like their grandparents, moving in with their parents, and spending almost all of their income on rent or mortgage payments. But you won’t read about any of that in the news. The housing market is scary right now, and there aren’t enough positive housing market stats to balance out the negative ones. Fortunately, we don’t believe everything we read. Most of what you hear about the housing market crash is based on old information and shortsighted analysis. The truth is: Housing markets are cyclical and they ALWAYS recover from recessions. We see 5 strong reasons why it hasn’t crashed yet.
The unemployment rate is still high
The unemployment rate in 2000 was 3.8% and in 2007 it was 4.4% In comparison, in 2018, it was 3.7%. Though this might not seem like much, with fewer people working, the demand for houses is lower. Fewer people can afford houses, and fewer houses are needed. Lower demand leads to lower home prices. To make matters worse, the U-6 unemployment rate, which includes people who are underemployed and want to work more hours, is 16% and has been rising. The rate hasn’t been lower than 3.8% since 2002.
There’s still a ton of uncertainty in the economy
For the last decade, the average economic growth rate was around 2.5%. However, in 2008, the world experienced the worst economic crisis since the Great Depression, and growth fell to 0.7%. In the following years, it hovered between 1.5% and 2%. In 2017, it rose to 2.9%, which was the highest it had been since before the recession. But the growth of 2.9% is still lower than the 10-year average of 3.7%. The housing market typically does well when economic growth is high and inflation is low. If economic growth is high, that means more people are employed, which drives up demand for housing. If inflation is low, it means mortgage rates will remain low as well. But economic growth hasn’t recovered to its long-term average, and inflation is higher than expected.
Millennials are still buying homes
The median homeownership rate for people under 34 years old was just 35% in 2018, which is down from 38% in 2017 but still above the historic average of 34%. This number has been falling for decades, but it appears to be stabilizing. The last recession hit millennials hard, just as they were entering the housing market for the first time. They lost their jobs and had to move back in with their parents, and many have not yet fully recovered from the crisis. In fact, the last time the homeownership rate for millennials was this low was in 2003. But it’s important to note that younger generations always buy homes at lower rates than the generations before them. Not only are millennials not buying homes at the same rate as their parents did, but the rate at which they are buying has also been slowing down.
Supply has been constricted by regulation
The Home Builders sentiment index has been at its lowest since the last recession. This means that home builders are pessimistic about the future of the housing market. There are a few reasons why. Cities are passing laws that make it impossible to build more affordable homes. For example, in many cities, homeowners are fighting to prevent homes from being built in their neighborhoods. In others, cities are mandating that new homes be built with solar panels, which drives up their cost. Of the 25,000 homes that were added to the market in October 2018, only 16% were affordable for the average family.
Mortgages require more income and are harder to get
In the first quarter of 2019, the mortgage approval rate was at its lowest in 10 years. The approval rate measures the percentage of people who applied for a mortgage and actually got it. Higher interest rates and new regulations are making it harder for people to get a mortgage. The Federal Housing Administration, which insures mortgages for first-time home buyers and those with low credit scores, raised its rates in October 2018. The average FICO score required to get a mortgage dropped from 753 in 2000 to 696 in 2007. In 2017, it was 671. And in the first quarter of 2019, it rose to 679.
Housing markets are cyclical, and they always recover from recessions. If you look at the unemployment rate, economic growth, and the sentiment index, it’s clear that the economy has not yet fully recovered from the last recession. But when it does, the housing market will recover with it. The housing crisis of today is not as bad as the housing crisis of 2008. And if you’re an optimist, you’ll know that it will get better.