Home News The Illusion of Housing Wealth

The Illusion of Housing Wealth


There is nothing quite so comforting as financial security. For a good night sleep or having bright sunny attitude toward life, having a fat financial cushion is pretty awesome.

For about 62 million American families, financial security comes in owning their own home. Of course there is that monthly mortgage, continuing maintenance and property taxes. There is no way of avoiding these little nuisances.

For most families, their home is their biggest investment and one that appreciates in value. If you bought your home anytime in the last decade you are doing well. Government data shows that in the last six years average housing prices have risen just about 50%.

The Millionaires Hood

The online real estate firm Zillow has even created a new category: the million-dollar neighborhood. In the opinion of many, Zillow may be overreaching in the name of publicity. Their definition of a million-dollar neighborhood is where just 10% of the homes in a zip code have such value.

Zillow calculates the total to be 1280 zip codes am impressive 37% gain over the past year. We have all come to understand why this is happening. The inventory of unsold homes, recently reported to by 1.9% is the second lowest in 30 years.

So if you are one of the lucky 60+ million American families who are well ensconced take joy in the fact that if your home is just average, it is appreciating better than 5% annually and that beats the sox off of a bank saving account: pretty nifty.

One particularly cynical financial advisor I ran into recently described a house as “nothing more than a money sponge on a foundation”. When your money sponge is adding more than 5% a year that will quiet even the most cynical.

The Flip Side Could Put The Breaks on The Economy

Housing is one of the key drivers to the US economy. During the years following the financial crisis, rental construction served as the driver of the housing market. Millennials by the bazillions grabbed up new rental units as soon as a leasing office opened.
The economics of housing are changing. Growing demand is not producing enough supply.

Millennials are having children. That is a plus for housing ownership. Colleges are still graduating bright young members of the next wave waiting to strike out on their own. That is another plus.

However, wages are stuck in neutral even though the unemployment rate around 4.3% is low and certain skilled jobs are going unfilled.

Each of these factors when combined with ultra low interest rates should add up to record days for the home construction industry. Unfortunately this is not happening.

The Commerce Department report for July showed new home sales declined 9.4 percent to a seasonally adjusted annual rate of 571,000 units last month, the lowest level since December 2016. The percentage drop was the largest since August 2016. Consensus expectations were for a 0.3 percent gain.

New home sales, account for 9.4 percent of overall housing sales, are volatile month-to-month. Nevertheless sales declined 8.9 percent on a year-on-year basis, the first annual drop since February 2016.

Economists are now taking note of the number of stay at home kids. This includes everyone over the age of 18 that are still living with their parents. This translates into a decline in the category “family formations”. This has been particularly noticeable over the past two years. This reverses a rising trend in family formations following the financial crisis.

The Data Doesn’t Add Up

It doesn’t take Robert Shiller, the Nobel Prize winning economist to see that the data is pointing in different directions.

In a low interest rate environment with heavy demand and record high prices, home construction should be humming at a record pace. With unemployment at a 10-year low, wages should be moving up. Instead we have declining family formations, home prices that continue to rise rapidly and lots of millennials driving mammoth distances to find affordable housing.

The US economy is barely hitting 2% annual growth while the stock market seems to be priced for something much more. Keep cozy in your home and enjoy the security.