Remodel Vs Buy on this Terminal Value Market
July 1, 2018
More Than Half of U.S. Markets Were Overvalued in April 2018
Home prices were up 6.9 percent year-over-year.
Markets are defined as overvalued when home prices are 10 percent higher than the long-term, sustainable level in the local market, per CNBC
. Even though San Francisco is one of the most expensive markets in the nation, with prices up more than 12 percent YOY, it is considered “at value,” because local incomes can support these prices. Markets that are overvalued include Denver, Houston, Las Vegas, Los Angeles, Miami, New York, and Washington D.C.
“The best antidote for rising home prices is additional supply,” said Frank Nothaft, chief economist for CoreLogic. “New construction has failed to keep up with and meet new housing growth or replace existing inventory. More construction of for-sale and rental housing will alleviate housing cost pressures.” Some argue that the improving economy will support higher home values. So far that appears to be the case. Overall home sales have been weakening, but most blame that on lack of listings more than weakened affordability, although higher prices have to be sidelining some buyers.
Of the nation’s 50 largest housing markets, 52 percent were considered overvalued in April. CoreLogic determines affordability “by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).” In March, 50 percent of markets were considered overvalued.
A market is considered overvalued when home prices are at least 10 percent higher than the long-term, sustainable level. By the same metric, 34 percent of the largest markets were considered at value and 14 percent were undervalued.
Not all expensive markets, however, are considered overvalued. San Francisco, for example, where prices are up more than 12 percent from a year ago, is considered at value, because local incomes can support the area’s prices. Boston is also considered at value.
Overvalued markets include Denver, Washington, D.C., Houston, Miami, New York, Las Vegas and Los Angeles.
CoreLogic revised its annual home price growth for all of 2018 to 5.3 percent from 5.2 percent.
High demand and very short supply continue to drive up home prices. The supply of homes has been dropping for three years. While more homes came on the market this spring, they have been selling at the fastest pace on record, according to the National Association of Realtors.
Homebuilders are slowly ramping up production, but most of that is at the move-up or luxury level, not at the entry level, where most of the demand is. Sales of newly built homes fell in April, according to the U.S. Census, even as supplies in that category rose. This is likely because of higher prices.
“The best antidote for rising home prices is additional supply,” said Frank Nothaft, chief economist for CoreLogic. “New construction has failed to keep up with and meet new housing growth or replace existing inventory. More construction of for-sale and rental housing will alleviate housing cost pressures.”
Rising mortgage rates also continue to weaken affordability. Rates have been rising steadily since this year. While they did take a step back last week, as bond yields dropped, they are on the rise again this week. Mortgage applications to purchase a home have also been falling for several weeks.
Some argue that the improving economy will support higher home values. So far that appears to be the case. Overall home sales have been weakening, but most blame that on lack of listings more than weakened affordability, although higher prices have to be sidelining some buyers.
“Extremely low inventory conditions in most markets are preventing sales from breaking out, while also keeping price growth elevated,” said Sam Khater, chief economist at Freddie Mac. “Even if rates climb closer to 5 percent, sales have room to grow more, but only if current supply levels start increasing more meaningfully.”
Homeowners, especially in the Western U.S. with higher home equity, are starting more home projects than in years past, per survey data from HomeAdvisor
, with Boomers and Millennials leading the way—the former more likely to hire a pro, the latter more likely to do it themselves, The Denver Post
reports. HomeAdvisor chief economist Brad Hunter says Millennials are more likely to stay home and increase remodeling spending on favorite projects like finished basements, which they’re twice as likely to take on as are Boomers. “My hypothesis is they may have bought a small starter home a couple years ago, it has gone up in value, so they tap into their equity and add space in a home they’re already outgrowing.”
It’s a trend that has played out with increasing frequency not only in the metro area, but across the country and especially in the western U.S. Homeowners undertook more home projects in the period of February 2016-17 than in the previous year, and spent about $1,850 more, on average, according to HomeAdvisor’s 2017 True Cost survey.
There’s also a generational dynamic at work: baby boomers led the remodeling charge, followed by millennials. But the boomers were more likely to hire out the upgrades, while the younger generation leaned toward doing it themselves.
In addition to that, notes HomeAdvisor chief economist Brad Hunter, millennials are more likely to stay and increase their home improvement spending. And they have some favorite projects, like finished basements, which they’re twice as likely to take on as are boomers.
“My hypothesis around that is they may have bought a small starter home a couple years ago, and it has gone up in value, so they tap into their equity and add space in a home that they’re already outgrowing,” Hunter said.
“If you sell, and you want an upgrade, you’re buying into an expensive housing market as well, so you’re not going to get a lot,” he said. “We’re finding that, as prices continue to escalate, you can spend $15-20,000 on a couple of bathrooms and you’ve got a nice house again and can enjoy it.”
Statistics on new home starts — including condos and townhomes — in metro Denver put those who would cash out and move in a similar quandary. Fewer than 1 percent of starts in this year’s first quarter
were below $300,000, compared to 3 percent in 2017, according to Metrostudy, a home construction tracker.
And only 22 percent were priced under $400,000, roughly half the percentage of two years ago.
Recently, bathroom re-dos passed kitchens as the most common home improvement project, according to a survey by the National Association of Home Builders.