Housing market is partying like it’s 2006

house for saleAfter month’s worth of good housing market news, many optimistic home buyers and sellers are preparing for their jump into the market. But some caution that not all the data is positive and the jump into the market should be taken with care.

Have you noticed when there is positive housing news, someone offers data that throws a wrench in the recovery party? Maybe we’ve just become overly analytical about the housing market, looking for reasons to be optimistic. If one month’s home sales exceed expectations, the buzz is about how the market is recovering and anecdotes about multiple offers and fast sales are talked about as if it is the norm. However, when there is a disappointing month, some will try to explain it away giving reasons such as winter weather (even though the data is already seasonally adjusted) or some other one-time incident.

If you haven’t yet figured it out, housing economics is not cut and dried – there is truth in opposing views. The good news is that those who are positive about the housing market are probably correct; the bad news is that those who urge caution are also probably correct. The truth is that since 2010, the housing market has cycled with a two year period oscillating between positive and negative data – one year showing promise, while the next disappoints.

Sure, home prices have increased in recent years, with the sharpest increase occurring from 2012 through 2013. But rebounding home prices are like the sword of Damocles hanging over the housing market: as home prices rebound, affordability has become an issue for many home buyers.

Furthermore, there is a consensus that interest rates will rise sometime in the near future; and some are worried about the effect on the housing market. Spencer Jakab of the Wall Street Journal made this clear in his March 30th piece (Spring Puts Bounce in Housing Market: Home Prices May Get a Second Wind: wsj.com) by explaining the relationship between mortgage costs and affordability.

Jakab starts off by saying “The demise of the housing recovery has been greatly exaggerated.” And points out how home prices have rebounded, while February home sales were as good as (if not slightly better than) February 2014 (regardless of the two year cycle). He also indicates that although home prices have not reached their pre-crisis levels, they are at the highest levels since the crisis. However, he cautions those who are ready to call it a housing recovery trend. He states: “Once the Federal Reserve starts raising interest rates, likely sometime this year, affordability will begin slipping. Say 30-year mortgage rates are a percentage point higher a year from now, and prices are 5% higher. Then a monthly mortgage payment, assuming a typical down payment, would rise by about 18%.

Considering that average wages increased 2.1% during 2014, an 18% increase in the cost of home ownership could arrest home price appreciation and possibly cause a déjà-vu market liken to 2008-2009. If you don’t remember: homes were on the market for extended periods; home prices decreased; and home buyers and sellers retreated.

So why should we get all excited about a little good news? Rather than focusing on 2 data points each month (comparing a month’s data to the previous month, and the same month from the previous year), maybe it’s time to focus on the bigger picture.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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