Housing Prices Peaking?
For many Americans, owning a home is part of the American dream. It is a way to build long-term wealth regardless of where they were born or what socio-economic class they belong to.
Before the Great Recession of 2007-2009, the U.S. homeownership rate peaked at a high of 69.4% in the second quarter of 2004. The homeownership rate soon plummeted to a low of 63.1% in the second quarter of 2016. Since reaching the bottom, the U.S. housing recovery sustained a sharp rebound, as the ownership rate jumped to a recent high of 68.2% in the second quarter of 2020. However, with home prices escalating sharper higher, it is prohibitive for many Americans to purchase a home. The rate of homeownership has recently slipped to 67.2% during the third quarter of 2020.
So, does this imply U.S. housing prices are peaking?
From a longer-term perspective, there is a direct historical correlation between the cost of buying a home and the percent of households that own their own home. For instance, from 1996 to 2006, both the price of homes and the homeownership rate increased. The rising trend ended abruptly, coinciding with the global financial crisis as housing prices plunged and U.S. homeownership plummeted to a historically low.
If homeownership became less attractive, it is reasonable to expect home prices and homeownership would decrease. Similarly, if there is an increase in demand for homes, then the homeownership rate should also increase along with prices. The housing data now shows U.S. home prices and homeownership beginning to diverge.
For example, in the wake of the financial crisis, house prices declined by over 25 percent. The S&P Case-Shiller U.S. National Home Price Index fell from an index price of 180 to around 135. The U.S. homeownership rate also dropped from a high of 69.4% to 63.1%, its lowest level since the 1980s. It interesting to note that unlike in the past, today's homeownership rate (67.2% - the third quarter of 2020) continues to decline further as the U.S. house prices (222.392 – Aug 2020) continue to climb to record highs.
With more than 27 years of history, the S&P Case-Shiller Home Price Index remains the leading proxy for U.S. residential real estate prices, at least in tracking changes in the value of residential real estate across the country. Based on the recent data released, it shows the U.S. National home prices rising across the U.S. while at the same time, the rate of homeownership falling. Is the negative divergence developing between these two important data sets signaling an inflection point?
There may be factors that explain the diverging trend between U.S. home prices and the homeownership rate. From the supply side, there continues to be a strong trend toward less construction for starter homes and more construction of large single-family homes. The imbalance may partially explain the increased prices for those homes and fewer new homeowners. From the demand side, the foreclosures during the Great Recession may have adversely impacted many Americans to the risk of homeownership. Despite the historically low 30-year mortgage rates, the aftermath of the housing bubble may have also created tighter credit conditions and reduced east access to mortgage credit for many potential lenders keeping homeownership out of reach for many households. Real estate investors may be turning to the purchase of properties for rental income, forcing up the home prices and depleting the number of homes available to other potential homeowners.
Another study (histogram chart) shows the year-to-year growth rate of the National average home prices in the United States (blue bars) as compared to the 20 largest metropolitan areas (red bars). Since the largest 20 metropolitan areas are part of the United States, it is reasonable to expect that both trends should move in the same direction. However, this year the S&P/Case-Shiller 20-City Composite Home Price Index has lagged the S&P/Case-Shiller U.S. National Home Price Index on a percent change.
Why? The average home prices in the larger metropolitan areas such as New York City, San Francisco, Chicago, etc. have appreciated at a slower pace than at the rural and smaller metropolitan areas. The last time we experienced this condition was during the 2012 timeframe. Is this a temporary aberration in the historical trend, or does this action warn of a directional change in U.S. housing prices?
In summary, following an unforgettable year, 2021 may turn out to be an inflection point for many Americans – especially for those that may be looking to buy and sell homes.
Please refer to the enclosed charts for further information.