If you are in a real estate related industry right now, it’s hard to deny the fact that inventory issues have finally come to a head. It all sounds eerily reminiscent of 2005 when there were 20 offers on a house within hours of hitting the MLS. With interest rates and home prices on a steady climb, we should expect to see decreasing affordability create a stall in demand in Las Vegas, right? Not so fast…
Although affordability is one way to stall demand in a hot market like Las Vegas, it’s not likely that it will even be a speed bump in the near future and here’s why.
While home prices are easily outpacing income growth, the low-interest rate environment has helped keep affordability in check. Median household income has increased nearly 20% since 2010, and in the same timeframe, existing home prices have gone up a whopping 100%). Increasing home prices, while frustrating for buyers, tend to have a much lower impact on affordability than rising rates. In fact, affordability is near its highest in 40 years. In 1980 a family with the median household income could only afford a home ¾ the median home price, compared to today where the very same family can afford a home nearly 1.5 times the median home price (thank goodness as we don’t need any more demand for homes under 300k than we already have).
Conversely, mortgage rates tend to have a much greater impact on affordability. In a recent study performed by Trulia, they found that if interest rates increased to levels seen in the 1980’s “the median household would go from being able to afford a $312,653 home to a $144,805 home”. I think it is safe to say that no one expects to see 30 year fixed rates near 16% anytime soon, but it does make sense to understand how rising rates can affect the market. To put things in perspective, for every 1% interest rates rise, affordability decreases by roughly 5.4%, and we have only experienced a modest increase in interest rates since the lowest point in history. In late 2016 30 year fixed rates were in the mid 3’s and as of the beginning of Q2 2018 rates are hovering in the mid to high 4’s, which is not enough impact on affordability to make even the smallest dent in demand.
Affordability in the Future
Clearly, the current demand will continue to drive home prices up in the foreseeable future, but higher home prices alone won’t have a significant impact on affordability. As stated above, interest rates have historically had a far bigger impact on the housing market than home prices, and we are not going to see rates high enough to cause issues anytime soon. As economic conditions continue to be favorable, it is expected that mortgage rates will continue to rise in 2018 but don’t count on rates in the 6’s in 2018, in fact, most predictions put rates in the high 4’s by the end of the year.
So if rising home prices and steadily increasing interest rates don’t appear to be a threat, then what could cause a cooling of the market? One thing that could potentially slow demand is sentiment. On top of the frustrations of actually getting an offer accepted, some buyers are experiencing a bit of sticker shock. For the better part of a decade, consumers got used to rates in the 3’s and low 4’s and when rates temporarily moved above 5% every lender out there got cornered with the same questions and general indignation about a rate in the 5% range. When you couple sticker shock with the daunting task of getting an offer accepted, we could see some qualified buyers exiting the market (at least temporarily). Another potential issue is the lack of housing options for entry-level and millennial home buyers. Production of new homes under 200k is nearly non-existent in 2018. The past couple of years
have pointed to a clear shift to build new homes priced between 300k and 500k. This leaves even less inventory for new homebuyers looking for starter homes. Metrostudy housing stats recently stated, “Production is moving into the higher price points as only 21% of starts were priced below $300k, while in 2016 42% were”. So while housing may remain affordable, it doesn’t really matter if there aren’t enough houses to buy.
Las Vegas continues to be fertile ground for case studies in wildly extreme markets. One thing that seems evident is that there are very few headwinds that might slow the high demand for homes right now. Affordability, jobs, income, and mortgage rates don’t appear to be serious threats in the foreseeable future; maybe someone will come up with an elegant solution to keep demand and inventory in check, but I wouldn’t count on it…