Last week the National Association of Home Builders’ Housing Market Index (HMI), which measures homebuilder confidence, jumped to 29. Although 29 is the highest level the index has reached in four years, it is still below the 50 mark that represents the dividing line between growth/optimism and contraction/pessimism. The higher HMI mark does not give reason to set off fireworks and declare the beginning of a new age of housing growth, but it is one more sign of progress.
An Over-Farmed Housing Market?
Being raised in the farm belt of Texas, I can’t help but think of housing in terms of farming. Years of over-planting can deplete the soil and destroy the crops. Farmers then must “lay out” land, which requires them to plant no new crops for a period of time and use various treatment methods to replenish the soil. In housing, after years of over-planting homes, there was a massive crop failure. The land lay fallow for years, but now we’re seeing signs the soil is being prepared for the next new crop.
In many areas of the country, the rent/own equation now favors owning. In a webinar earlier this month hosted by Callahan Financial Services, I presented a slide using historical trends that show how home prices in many bubble real estate markets over-corrected to the downside. Affordability is now the best it’s been in many years. Builders have under-built for almost five years, which was necessary given the over-built bubble, and affordability is now the best it’s been in many years.
What’s Driving Home Purchase Growth?
In addition to an increase in primary residence purchases, we are also seeing strong growth in investment purchases. Sure, there are still some flippers and investor groups who are only holding property for a year or two, but the data shows individual investors are taking up a growing share of the investor market. For the most part, these are the investors we need. Many of them are simply tired of being burned in stocks and can’t stomach low bond yields, so they are buying homes for long-term investments that cash flow out.
For investors who do their homework, buying rental properties makes sense and will help soak up some of the foreclosure supply. This is an area in which many credit unions can be effective because you know your local market and you know your members. Plus, these loans can command a higher interest rate. This isn’t necessarily an opportunity in all markets, especially in those where rental properties still do not cash flow out. But, for the rest of you, this is something worth exploring.
Housing Rebound: Planting A New Crop
The groundwork is being done to enrich the soil for housing. Affordability is better, quality investors are active, builders have under-built, and consumers have stayed out of the market for a long period of time. Of course an ill wind could blow in from Europe and strip away the topsoil, but conditions are getting favorable again for planting a new crop. Sure, we must see a better job market and rising wages for a bountiful harvest, but this could be the last year of lay out for housing.
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