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What’s Up With Housing?

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Everything was just right for the perfect storm in home buying. Millennial’s represent a huge pool of demand. After years of job searching, marriage and child bearing in cramped rental spaces, 2017 was the year to make a house a home.

So far it isn’t turning out to be this way. Fewer people than ever believe that it is a good time to buy a home according the Fannie Mae monthly survey. The cause appears to be housing affordability. Homes are in short supply and accordingly very pricy. But wait, something isn’t making sense.

The index of National Home Prices is up 5.75% over the last year*. Reports abound of a shortage of homes for sale especially in regions like Silicon Valley where job creation is best.

Now mortgage rates are heading higher and that is going to put a further pinch on demand. But if a shortage of homes is pushing prices up, new home construction should be booming.

All Is Quiet On The Construction Site

That’s not happening. Housing starts for the last three consecutive months have been falling including 7.7% in March and 2.7% in April. The recently released May figure was down 5.5%. Folks, we talking about the spring time when these numbers should be humming.

What’s up with these numbers, the higher prices should be stimulating construction. Home building giant, Beazer Homes is raising $500 million in a highly complex public financing so there is plenty of money for developers to build new homes.

Occasionally data on the economy can defy logic in the very short term. Lots of reasons account for this. In this case, the economic logic may be less obvious.

Rental Obsession

Since the financial crisis in 2008, housing construction has been in the hands of developers obsessed with building rental communities. In several major cities like New York and San Francisco occupancy rates peaked about two years ago.

Since then construction activity has outpaced the growth in demand resulting a softening in the rate of rent inflation. Nobody is taking up a collection for builders of rental properties; it is just that the bloom may finally be off the rose for these guys.

Rational Thinking Attempts To Explain The Situation

Ask virtually any real estate agent, what is the single most important factor that goes into making a home buying decision and the answer will be emotion. In the first five minutes, if the potential buyers eyes light up, there is a deal to be made. It is all about feelings.

Imagine the feelings of a young family of four living in 950 square feet of space walking into 2000+ square feet of stainless steel, hardwood floors and granite.

Leave it to academics like the real estate department at Florida Atlantic University to quantify the buying process. They approach home buying in the same way an investor would approach putting dough in an oil well. As students of business know, investment analysis is the discipline of comparative selection.

Another Index To The Rescue

FAU has created an index with the idea of creating maximum wealth accumulation over time. Actually, when you think of all the challenges to creating wealth, the FAU index makes sense.

What it shows is interesting but not particularly helpful in explanting anything. For example in exceptionally high rent markets like New York, Boston and San Francisco, the comparison between renting owning favors owning.

If you live in places like Cincinnati, Chicago or Cleveland owning is clearly your best choice. The only major markets where renting is the best economic choice is Denver and Dallas.

Mass Misinterpretation

When the FAU Index was released the mass media news headlines read, Don’t Buy A House. In reality, most of the key metropolitan areas that lead the nation in job growth favor home ownership. Areas on the East and West Coast are where the millennials are concentrating. It is also where housing prices are the highest and rising fastest.

So for all the academic contribution, we are back to the start; what’s up with housing? Housing is a key to the total economy so let’s keep watch as the summer progresses.