The housing market has been strong. Recent Case-Shiller data shows that average single-family home prices have risen 14.6% over the last year.1 As you can see in the chart below, US average single-family home prices have now exceeded their levels from their prior 2007 peak. With that level of increase, there are concerns that housing has become overheated and we are potentially going to revisit another housing crisis like 2008-2012. In our opinion, however, the current situation is quite different from the past.
The first difference is the percentage of household income people are using to pay for their mortgage leading up to The Great Financial Crisis vs. the percentage being used today. The chart below shows the amount of household debt service as a percent of income. At the peak of The Great Financial Crisis, household debt service as a percentage of income reached 13.2%4, the highest level going back 40 plus years. The current number is 8.2%, the lowest percentage since 1980. While home prices are rising fast, US households are using a much smaller percentage of income to pay for their mortgage than they were in the 2008 housing bubble. Furthermore, as a result of this reduction in household debt, the overall net worth in the US is at all-time high levels.4
Second, population changes are creating a source of incremental housing demand. Millennials are among the largest cohort of population5 and are now in the prime age range for homeownership. This is a natural source of higher demand that, absent a significant increase in supply, creates a tailwind for housing prices.
Regarding supply, the third difference between now and 2008 is that housing has been in a relatively long-term undersupply condition. We are only now starting to build the amount of housing needed to accommodate normalized demand.6 This lack of supply, along with lower supply of existing homes for sale, has further exacerbated price increases. The COVID-19 pandemic has also spurred moves to the suburbs as inner-city dwellers have adjusted their priorities in a post-COVID world.7
While prices can fluctuate, there are clearly differences from the highly leveraged and oversupplied housing market of 2008 to what is happening in the housing market today. Based on incremental demand, relatively healthy consumer balance sheets, and a rationally supplied market, we believe current trends are reflective of natural supply and demand, and not indicative of a “bubble” type environment.
As a result, we remain comfortable owning certain areas of the housing market, including government-backed mortgage bonds as well as home improvement stocks like Home Depot (HD) and Lowe’s (LOW). Moving forward, we will continue to look for opportunistic investments in areas that benefit from, what we believe, will be a healthy housing market for the near to intermediate-term.