Last month I reported on the Year In Review Residential Market Update where local economists said they expect 2016 to be a great year for the economy and real estate. This month I share with you Keller Williams Realty Co-Founder Gary Keller’s Vision for 2016 and beyond. Gary spoke a couple weeks ago in New Orleans at the annual Keller Williams Family Reunion where the franchise’s agents from around the world convene at one location for a sort of “recharge” conference.
In Gary’s Vision 2016 speech, he basically said that the high housing demand from buyers, the very low inventory, and the low interest rates are great for the real estate market, but not so great for home prices which are rising too rapidly. He says this momentum will inevitably outstrip the ability for buyers to afford homes because wages and inflation are not increasing at the same rate.
Gary said that 2015 was the fifth best year in home sales in the history of the United States. And three of the top nine years in the history of real estate have been in the last three years! We are seeing the highest peak in home prices in real estate history. The image below shows the annual average trend line for median home prices since 1989. At an average of 4% it was on track until we hit 2001. At that point the trend line reset itself, and notice that we are on the edge of the trend line now possibly setting up for another slow down in the market.
Right now buyers are enjoying low interest rates that average about 3.65% for 30 year fixed conventional loans. The problem is there aren’t enough homes on the market. Buyers are competing for the same homes and driving the prices up. There is extreme pressure for the Fed to raise interest rates, and when that happens the monthly cost to finance the same home will go up. A 1% mortgage rate increase equals about a 10% increase in the monthly cost of a home.
We are also seeing fewer first time homebuyers than the market needs to remain healthy. Nationally, about 32% of home buyers in 2015 were first time homebuyers. Gary said this percentage needs to rise to about 40%. It all starts with the first time homebuyer buying the lower priced homes which then allows those sellers to move up into larger and more expensive homes, and so on and so on like a domino effect. Student debt is a large reason why first time home buyers are putting off the decision to buy. They are graduating from college with too much debt to be able to afford a home.
The image below shows how now is the best time for buyers to afford a home as compared to what it’s been like in the past. The average home buyer will spend about 15% of their income on mortgage payments. For first time home buyers, that percentage is actually higher…more like 25% of their income.