Where are we in the real estate cycle?
What Harvard thinks anyway…
Hindsight is 20/20
We now know that late 2006 was the height of the bubble and somewhere in-between 2010 and 2011 was the bottom.
Where are we now though?
We clearly aren’t at the bottom and not at the top….
Let’s look at this cycle from a traditional supply/demand balance.
Supply
• In 2012, new home sales posted their first year-over-year increase in seven years, up nearly 20 percent (368,000 units) from 2011’s historic low.
• The number of existing homes on the market entering 2013 was just 1.8 million, more than 500,000 less than a year earlier and the lowest level since 2001.
• The total inventory of new homes for sale remained at historic lows throughout 2012, holding near 150,000 units. With sales levels picking up, as of January 2013 the stock of new homes for sale represented only 4.0 months supply.
Demand
The Upturn in Household Growth is a Key Element in the Housing Recovery
• Household growth increased to 980,000 in 2012—up sharply from the approximately 600,000 average of the previous five years.
• While still below pre-recession levels, the foreign-born population—a key component of household growth over the last decade—registered its largest increase since 2008.
Source: Joint Center for Housing Studies at Harvard University
The Intersection of Supply and Demand: Credit
While there is a very positive backdrop for housing in 2014 with rapidly rising demand, limited supply and record affordability there remains a major headwind.
This headwind is getting a loan to buy a house. Otherwise, known as a mortgage.
From a recent report:
For most of the 2000s, credit scores on GSE-backed loans averaged around 720 while those on FHA loans averaged around 650; with the onset of the housing crisis in 2008, credit scores in these market channels turned up sharply, to roughly 760 and 710, respectively.
• In 2007, borrowers with credit scores below 620 accounted for 45 percent of FHA loans but by the end of 2012, that share was under 5 percent.
• The average credit scores of conventional mortgage applicants denied credit in the first quarter of 2013 were 722 for refinances and 729 for purchases.
• Among those seeking conventional home purchase loans, mortgage denial rates in 2011 for African-American were 36.9 percent—more than twice the 14.0 percent rate for white borrowers. Hispanics fared little better, with a denial rate 10.4 percentage points higher than the white rate.
Summary
So where are we in the real estate cycle? Howard Marks, my favorite money-manager of Oaktree Capital fame, recently stated:
I think most asset classes are priced fully — in many cases on the high side of fair — but not at bubble-type highs.
I very much agree. With the credit restrctions placed on the majority of households, I believe 2014 will look very similiar to the 2013 real estate market.
I will leave you though with one of my favorite quotes from Warren Buffett:
. . . the less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.
Jimmy Moncrief is a real estate banker and investor. He blogs at realestatefinancehq.com
