With the recent decline of the housing market, amongst several other financial issues plaguing the United States economy, I’ve given a good deal of thought to the housing market outlook. As a result, I decided to take the plunge and buy a house of my own. Though I will post future articles about the homebuying process (an arduous but manageable process in my experience), I will discuss here my thoughts on the housing market conditions in the near future.
Supply and Demand
Since we live in a supply and demand economy, it seems a logical starting point to analyze the quantity of habitable homes in existence and compare that quantity to the number of individuals that make up the home-buying consumer marketplace. According to estimates of the housing inventory by the US Census, there are approximately 130 million homes in existence in the United States. For the purposes of our discussion, let us assume that 1/2 of owned homes will be occupied by married couples between the ages of 25 and 75 (with or without children under the age of 25 or parents/grandparents over the age of 75) and that the other 1/2 of owned homes will be occupied by single adults between the ages of 25 and 75 (under the same conditions). According, again, to estimates by the US Census, of the current US population between the ages of 25 and 75, we have approximately 184 million people in our home-buying consumer marketplace. If 2/3 (123 million) represent married homebuyers (62 million homes) and the remaining (61 million) represent single homebuyers (61 million homes), we have an effective home-buying consumer marketplace of 123 million buyers.
We see an initial disparity of 7 million unaccounted for homes. Whether these remaining homes represent a significant pressure for lower home prices is up for debate. According to US Census data, the population in the age group of 25 to 70 will increase by approximately 22 million by 2020, filling those unaccounted for homes as well as increasing demand for additional development. Further, in the immediate future, might these “extra” homes serve simply as a buffer of “for sale” homes on the market for the mobility of buyers, contribute to the inventory of vacation homes, or serve as rental homes? For simplicity’s sake, let us conclude that for the immediate future, there is neither a significant number of homes in the US to represent a surplus when compared to prospective market demand, nor is there a significant lack of homes in the US compared to prospective market demand.
Price
According to the US Census, the median home sale price in February, 2010 was approximately $220,000. According to Bankrate.com, one’s monthly mortgage payment, including principle, interest, taxes and insurance (PITI) should not exceed 28% of one’s gross income. According to the US Census, our median household income (for 2007) was approximately $50,000. At 28%, this affords us approximately $1,200 per month for our PITI. Assuming a combined tax and insurance cost of $3000 per year, with a 5% interest rate, we should only be able to afford a $180,000 home. This supports a decline in home prices by 18%.
The median affordable US home could be offset by an increase in median income. According to Federal Reserve data, our monetary base increased from $1.6 trillion to $2.1 trillion in the past 12 months. This represents a 24% increase in the money supply over the course of a single year. The 24% increase in the money supply should trickle, increasing both median income and median home prices by 24%. This would offset the aforementioned projected 18% decline in home prices. Should the US Federal Reserve continue to print additional currency, I gather we will continue to see a related increase in home prices.
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