This market update is brought to you by the letter P, as in Perspective.
Today, we’re bringing you another market update to give you more perspective It’s really important in this changing market to understand how we got here. This is so we can understand what might change and affect the real estate market going forward.
For this market update, we’re going to go through a few graphs. These graphs will draw your attention to some historic macroeconomic indicators. We’ll also look at some of the microeconomic activities. Then, we’ll look at how these might impact your buying and selling choices in the Bay Area real estate market.
Just a quick note before we proceed: all of this data was produced by Keller Williams Worldwide, and they have copyright on all the graphs. Lastly, a quick disclaimer before we dive into the first graph, make sure you also verify any of this information before you use it to decide your own situation.
Consider the graph above on quarterly GDP. Since 2012, we have seen fairly status quo growth in GDP, and then COVID hit. When COVID hit, GDP went way down. The GDP in the first quarter (Q1) of 2021 was -5.1%. This went further down in Q2 at -31.2%. This, as everyone remembers, was largely due to the lockdowns and economic contraction. Then, stimulus programs and tax cuts came in, and we all saw a big lifestyle change. People started to spend more time at home, and home values were going up. Therefore, consumers felt more confident relative to the economy.
That is why in Q3, there was a big upward trend right after the large downshift in Q2. The GDP in the third quarter of 2020 was a resounding 33.8%. However, after both these downward and upward surges, the GDP kind of “stabilized.” It went back to levels of around 2.3% to 6.9%, which are slightly above what they were before the pandemic happened. However, we’ve seen the GDP go down these last couple of quarters to -0.9% and even -1.6%.
When you layer that GDP growth or negative growth in some of these quarters on top of consumer confidence, what you get is this next graph.
The graph above shows a really interesting and very stable perspective on consumer confidence up until the pandemic began. In April 2018, consumer sentiment was at 98.8. This pretty much oscillated at this level until the pandemic hit.
Before it began to dip, consumer confidence in February 2020 was at 101.0. After that, we saw that big, sudden dip to 71.8 in April 2020. It gradually came back up to 85.5 in June 2021 before going back down again to 70.3 in August 2021.
Since then, consumer confidence has been going down continuously, reaching 59.4 in March 2022 and as low as 50.0 in June 2022. It recently increased a bit to 51.1 in July 2022. However, current consumer confidence is at a pretty low level. We’re now at nearly half the level we were at pre-pandemic, and it’s lower than it’s been in recent memory.
Unemployment and Job Openings
This is what is confusing, though—unemployment is really low and job openings are at an all-time high.
That being said, it’s a very confusing graph when you consider the fact that jobs are really stable.
According to the data, the number of job openings from January 2019 to January 2020 was around 6.7–7.5 million. In addition, during that time frame, the average number of job openings was 7.15 million.
At the same time, the unemployment rate during that same period before the pandemic happened was 4.0%. After that, the number of job openings in April 2020 went as low as 4.6 million, with a staggering 14.7% unemployment rate.
During COVID, the unemployment rate rose by 10.7%. However, this didn’t last long, as the unemployment rate slowly but steadily decreased since then to 3.6% in June 2022. Simultaneously, the number of job openings gradually increased to tens of millions beginning in June 2021, with 10.1 million jobs. The number of job openings even went as high as 11.9 million in March 2022 before it went down to 10.7 million in June 2022.
So, as you can see, the number of openings versus unemployment has never seen this big of a disparity. With those present figures, basically everyone who wants a job can get one. We have literally twice the number of job openings as we did in the middle of the pandemic. The same goes for the unemployment rate, which is back to pre-pandemic levels.
So why is it then that consumer confidence is still low even though there are more job openings, more wage growth, and more people earning bigger salaries?
Well, it has to do with affordability, and as we all know, affordability has to do with inflation.
As seen in the graph above, inflation is higher than it’s been since the 1990s. The same goods are costing more than they used to. Rent, the cost of food, gas prices, etc. are all up!
CONSUMER PRICE INDEX
According to the data, in 1990, the annual consumer price index (CPI), excluding energy and food, was 5.2%. It was 6.1% when energy and food are included. In comparison, the core CPI, or when energy and food are excluded, was 5.5%. When energy and food are included, the annual CPI in 2021 was 7.04%.
In 2019, the annual consumer price indices, both when excluding and including energy and food, were around that target CPI of 2%. In 2020, the consumer price indices were below 2%. That means that the CPI in 2021, when energy and food are excluded, is higher than in 2020 by at least 3.5%. When food and energy are factored in, the annual CPI in 2021 and 2020 is at least 5.04%.
Rent prices have also increased due to inflation, as shown by the graph below. In the first quarter of 2000, rent was only $958 per month. This slowly increased over the years and reached $1,134 per month in Q1 of 2008. Then, it briefly decreased in 2009 and 2010, reaching $1,080 per month, before gradually increasing again in the succeeding years. Beginning around the first quarter of 2021, it rapidly increased and got as high as $1,639 in Q1 of 2022.
In fact, over the past handful of years, inflation has been quite low. So, even though wages are higher and people feel they’re making more money, the goods they’re buying cost more. Unfortunately, prices of goods like food, gas, and rent, among other things, have increased due to inflation. So, while people believe they’re making more money, the reality is that they’re also spending more money. So, that’s the crux of all of this.
Credit Card Debt of the average American Household
In addition, another interesting point to consider is the situation of credit card debt in the average American household. The average American household holds $4,000–$6,000 in credit card debt at an average interest rate of about 21%.
Because many people hold those balances, that equates to an additional $1,200 in interest payments per year. Then there’s also the high cost of gas and other household goods. So, it’s really not surprising that it’s eating up any wage growth that they’ve experienced. In the end, they’re basically in the same place, have lower confidence, and don’t want to spend as much.
Obviously, when we’re talking about housing, we’re also talking about interest rates. As we all know, interest rates are up. However, let’s take a look at the averages historically.
Based on the graph, the historical average of mortgage rates from 1972 to 2021 is 7.81%. Mortgage rates in 1972 were well below that median line or that historical average of 7.81%. The highest it has ever been in the same period is in 1982, with a staggering 16.63%. Furthermore, in 2021, the mortgage rate is only 2.96%, which is way below the historical average from 1972 to 2021.
What about if we shorten the period to consider? Well, if we look at the historical average from 1990 up to the present, the average rate will be 5.97%. Still, the average mortgage rate in 2021 is below the historical average of 5.97% for that period.
To put things in perspective, generally speaking, the real estate world has gone through a lot of ebbs and flows. This can be seen in the graph. However, it’s a good thing to note that at present, interest rates are somewhere between these two long-term averages.
Mortgage Rates in relation to Affordability
Now, concerning affordability, the recent history of interest rates has made things more affordable on a monthly payment basis. The low mortgage rates in the past few years helped resolve this affordability issue. It made it easier for people to afford a bigger house or just a house in the first place.
However, that has gone away as mortgage rates have now increased, just like we mentioned earlier. Smash that together with inflation, credit card debt, and some of these other household expenses. It now becomes difficult to actually make that payment to be able to buy that house.
Again, our current interest rates may feel so much higher than they have been over the past handful of years. Well, they are actually higher, but only if compared to the interest rates of the past few years. When compared to long-term historical averages, they remain quite low in comparison to what they were previously. So, this is just a good thing to keep in mind.
Another thing to think about in relation to interest rates
The fact that interest rates have remained low for many years is not a good economic indicator. It’s more healthy for the economy to go through these ebbs and flows. Yes, interest rates may be on the rise right now to combat inflation. However, that’s not to say that they won’t come down in the future at some point. This is just something to think about as it relates to the long-term prospect of purchasing a home and holding it for many years. It’s a good thing to remember that these interest rates will most likely come back down at some point. So, a refinance is certainly possible in the future.
Next, let’s take a look at the supply side of it, as everyone wants to talk about prices.
As you might have heard, house prices are up. They’re so high! And yes, we’ve not seen this type of double-digit increase annually, really ever.
Based on the graph above, in 1991, the median home price was around $101,000. In addition, home prices have increased annually from 1991 to 2021 by an average of 4%. This is indicated by the yellow line in the graph. In 2002, the average price of homes increased slightly higher than the long-term average increase of 4%. Similarly, in the years leading to the great housing crisis in 2007–08, home prices had also increased way over the long-term average. In 2006, the average price of homes was around $222,000.
However, beginning in 2008 and up until 2022, home prices have stayed below that long-term average increase of 4%. In fact, the average home price in 2011 was only around $166,000. This is way lower than the expected price that year based on the long-term annual average increase of 4%.
Then, in 2021, we’re finally catching up and sling-shotting over that long-term average line. According to the data, the average home price in 2021 was around $351,000, which is way over the four-percent line. Furthermore, the projected average home price in 2022 is around $395,000. This is also way higher than the projected $343,000 average home price based on that 4% annual long-term average increase.
And that has to do with the lack of inventory as well as the relatively inexpensive borrowing rates. This, by the way, goes back to the slide about interest rates from earlier. This also talks about “New Starts” or new inventory that’s coming into the marketplace.
So, when you look at the amount of construction—new single-family home construction—that’s happened in this country, we’ve had a significant deficit since the last recession.
In 2005, the number of new single-family homes being constructed was about 1,719 million. This is way above the historical average from 2005 to 2021 of one million home starts. It decreased to 1,474 million in 2006, and further down to 1,036 million in 2007. However, these figures were still above that one million average.
In addition, according to the data, the number of home starts each year from 2008 to 2020 is below one million. There were only about 616,000 new single-family homes constructed in 2008. The number of home starts also dropped to only 442,000 units in 2009 and has gradually increased since then, except in 2011.
This is because the number of new single-family homes constructed in 2011 dipped to 434,000. Then, throughout the succeeding years until 2020, home inventory has been rapidly increasing and catching up. The number of new starts increased to 1,115,000 in 2021.
In the years following the last recession up until the start of the pandemic, the number of new home constructions per year was only half the historical average. It is way below the one million per year we need to house all the new households in this country. That’s why it was not easy for our generation—the Millenials—who have been looking forward to buying a house.
Inventory was a bit lacking during that period. So, even though people want to buy a house, have kids, and settle down, it just didn’t happen. People didn’t have as many options when it came to buying homes and reaching other related milestones. There weren’t just enough new homes being built back then.
Furthermore, when you look at the confidence index for home builders, it has also been incredibly low. Based on the graph above, builder confidence is fairly high before the pandemic happened. Builder confidence was around 68 in April 2018, and it increased to 76 in 2019. Then, it plummeted to only 30 in April 2020. However, it skyrocketed to 90 in December of that same year. In August 2021, builder confidence was about 75. It increased to 84 in December before slowly going down to only 49 in August this year.
So, as you can see, builder confidence is really low right now. The reason for this is that the cost of everything required to build new homes has risen. This includes the cost of land, rates of loans to finance these projects, the cost of construction materials, labor, etc. That’s what home developers have to deal with before they can sell them and make a profit from them. Therefore, the likelihood that we see new construction starts show up en masse in the short term is very unlikely. So, chances are, we will see the inventory side of things lag. We will not see nearly as many new construction homes come on the market.
Home Sales Are Down
Another thing to note is that existing home sales are down pretty significantly year over year as well.
According to the data, the projected total home sales in 2022 are about 5.1 million units. This is significantly lower than the total home sales of 6.1 million units in 2021. That’s a difference of one million units in home sales! Yes, it may be true that total home sales in 2021 were the highest so far since 2007. However, the projected number of home sales this year is still lower compared to recent years. It is still slightly lower than those in 2018 and 2019, with 5.3 million units each, and in 2020, with 5.6 million units.
To summarize, what we’re dealing with is still a supply and demand situation.
On the supply side of things, it boils down to the units we currently have versus what we need. With how things are going right now, it doesn’t look like there will be a huge injection of additional units in the next handful of years.
Meanwhile, on the demand side, rising interest rates have certainly dampened demand. However, this isn’t totally out of whack based on what we’ve seen on a historical basis.
Do we see this completely falling off a cliff relative to history? No, we don’t. This is certainly very different than the market we’ve seen over the last handful of years. However, if we zoom out and get a little more perspective, we see that this is not totally uncommon for our economy.
So, that’s the perspective we were hoping to bring. Now, of course, all of this is subject to change with different things going on in Europe, China, and so forth. There are also the elections to consider, and other factors we can’t predict.
However, based on historic figures and trends, we’re still in line with a lot of those numbers. We’re still in line with the historic numbers we’ve shown earlier, like the lack of new construction starts. This supports the fact that the supply will remain low. As a result, the demand will still be forced to deal with a relatively limited number of homes. At least, that’s what we see in the short term but in the long term, it’s still to be determined.
WE hope our Real Estate Market Perspective 2022 has helped you.
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