The is the first article in our “Debunking the Housing Crash” series.
COVID-19 is one of the most deflationary global events to hit the earth since the meteor that took out the dinosaurs. When much of the United States and many other countries began enforcing stay-at-home orders, the economies of the world came to a grinding halt.
How is it then, that a deflationary event of this magnitude could not trigger a housing crash in the U.S.?
Yesterday, I spoke with a medical professional who is entertaining the idea of buying her first home. She is wicked smart and has already done a significant amount of research on housing and mortgage loans.
As her career has advanced and her income has climbed to a point that will enable her to easily make payments on a home, she has decided now is a good time to try and “time” the housing market and scoop up the deal of a century in real estate.
I cannot fault her intuition. From the outside, it seems there might be some desperate sellers out there who need to sell their homes immediately and at any cost. This means her dream home could be on the market being sold by someone who needs to sell quickly.
Unfortunately, “timing” the housing market is not that easy; if it were, we’d all be Warren Buffett-wealthy and be sitting on billions. The challenge with timing the market is that both equity, bond, and real estate markets are awfully complicated and there are too many facets for most outsiders (someone who has not studied the markets for as long as Warren Buffet) to ever correctly guess which direction the market is going to go.”
As deflationary of an event as COVID-19 has been globally, there are equal and potentially greater inflationary pressures currently pushing U.S. housing prices higher than they are today.
Reason #1: Record-low Inventory
As of year-end 2019 there were only 1.8 million homes for sale in the United States – an all-time low as a percentage of total population. Does 1.8 million homes for sale sound like enough housing inventory for a country with 328.2 million people and 128.58 million households?
Let me say it another way – for every 100 households in the U.S. today, there are only 1.4 homes for sale. Granted, not every household wants to buy a home (some prefer to rent), and not every household that currently owns a home wants to buy another one.
According to the U.S. Census, the current homeownership rate is 65.3%, and we know the average amount of time a homeowner stays in their home is about ten years. This tells us there are approximately 83,962,740 households that own a home currently in the U.S.
If each of these households move every ten years on average, this tells us there is a need for approximately 8,396,274 homes each year to fill the needs of buyers who want to move up, move down, relocate across the country, etc. By the way, this does not account for new household formations, we’re just looking at the number of existing homeowners likely to seek a new home this year.
Based on that math, there is roughly 4.6 times the number of buyers than sellers in the market. Could this be why multiple offers on the best homes in the best neighborhoods are commonplace right now even in the middle of the COVID-19 crisis?
>> Next: Debunking the Housing Crash: Rising Homeownership Rates