The last six years have been good for real estate. Home values have risen and gains have accelerated. The last housing boom was driven by fast and easy money, while the current market is driven by a lack of supply and surge of demand. Much like the prior housing boom, this is not sustainable.
A continued rise in home prices cannot continue because the average wage has not met the rate of increase. Mortgage interest rates are also a factor in affordability, however, because of the heightened demand, it is still believed that this type of growth is sustainable. Even with the economy improving, the rising interest rates will be a problem.
As it turns out, even with millennials hitting their home buying age, fewer homes are being toured and bid on. Whether that is because there was a drop off in homes on the market or prices standing in the way is yet to be seen. The new inventory put on the market in April was for higher-end homes and that is not typically what a millennial will be looking at.
With the biggest gains being in lower-end homes where the supply is leanest, many people who want to purchase their first home are throwing in the towel. First-time-buyers represent less of the market sales with the lack of affordability.
This decline merely reflects that things are returning to normal because that level of growth just is not sustainable. It also shows that there is a shortage of homes priced at below the median for first-time buyers. Even those that are priced well are subject to stiff competition from cash investors who run them off in a bidding war.
In April, half of the homes sold in eight days or less and the home prices were at least 13 percent higher than last year. This is according a report from the Greater Capital Area Association of Realtors about the Los Angeles area real estate market.
Assessing affordability is tricky. The argument is made by some economists that housing is as affordable now as it was at the turn of the century. That is provided that you adjust for inflation, of course. Even if that is true, the housing market today is nothing like it was then.
At the turn of the century, affordability wasn’t something that people thought about. With no money down, home buyers enjoyed low payments at the start of their mortgage. The mortgage products then used the negative amortization loans that lead to the housing crash. Those are not offered these days.
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