Housing Prices Pass an Important Threshold

In yet another sign that the U.S. economy is continuing to improve, the leading nationwide home price index recently hit a new high, finally eclipsing that of the housing bubble from a decade ago.

The Motley Fool's Gaby Lapera and contributor John Maxfield dig into this trend in this segment of Industry Focus: Financials. Listen in to learn about the underlying dynamics that cause home prices to rise and fall.

A full transcript follows the video.

This podcast was recorded on Dec. 5, 2016.

Gaby Lapera: Not only is unemployment down, but consumer confidence is up. There was a study that was released recently showing that a lot of Americans, more than last year, came out to shop for Black Friday. Although they technically spent $10 less than they did last year, they were still spending $290 on average during Black Friday -- which is not an insubstantial amount of money. And not only that, but housing prices are up. They have exceeded the levels that they reached during the housing bubble in 2008.

John Maxfield: Yeah. So, you start putting all these pieces together, and what does that puzzle look like? Unemployment at 4.6%, inflation slowly ticking up, consumer confidence is up -- the most recent survey is it was at 107.1 in November, and it was at 100.8 -- this is an index -- 100.8 in October. So, it was up 7% in November, presumably following the election. You have housing prices. That was one of the biggest bubbles in the history of the United States of America, the housing bubble in the lead-up to the financial crisis. And now, housing prices, on a nationwide basis, have now exceeded that as of last month. Now, there are certain pockets, like Las Vegas and Florida, where the speculative frenzy got out of control during the bubble, and housing prices are still far below. But once you put all these things together, and you look at how consumers were acting just two weeks ago, in the wake of Thanksgiving for Black Friday, one of the biggest shopping days in the entire year, and then you factor in that the consumer expenditures are 70% of the U.S. economy, and it really paints a picture of a very robust economy.

Lapera: I have a question. Do you think that houses are overpriced right now?

Maxfield: That is such a great question, Gaby. Let me tell you why. This is actually something I've been thinking about a lot. I live in Portland, Oregon, and there's something really interesting going on in the Portland, Oregon housing market. The way housing works is that, if the supply of houses in any particular month exceeds six months' worth of demand for houses, then the price of houses goes down. But if the supply of houses is less than six months' sales rate of houses over that same time period, the houses' prices will go up. Generally, in major metropolitan areas, the supply will be right around six months' worth of demand. It can fluctuate above and below that, but it won't fluctuate too far. Well, in places like Portland, the supply of houses is only equivalent to 1.5 months worth of demand. So, it is dramatically, dramatically lower. And what we are seeing is that prices are shooting way up. But then you wonder, is this another bubble? What's going on here? 

I think there's a number of things going on, but I think one of them is the fact that the mortgage rates are 3.5%. So, when mortgage rates are 3.5%, the cost of your housing is going to be so much lower, which means you can offset that lower cost on the borrowing side with higher home prices. So, you have that interest rate thing coming into play. Also, I think, as home prices continue to improve in all these different cities, those people who bought at the top of the housing cycle during the housing bubble, they are coming into positive equity. So then, my guess is, you're probably going to see the supply open up a little bit, because these people will then feel comfortable selling their house, because they won't have to do so at a loss. So, I think it's a great question, I don't know the answer to it, but those are the dynamics that are at play, for anyone trying to figure out what's going on there.

Lapera: Quick question for you, where did you get the data on housing supply?

Maxfield: I don't remember. I can't tell you exactly where I got that 1.5 months' worth number. It's just been in the local news here over the past few months -- well, really over the past couple years. I could tell you, we bought a house two and a half years ago, and we've had friends buy houses. I actually wrote an article about this maybe a year and a half ago. We had some friends come out and buy a house, and they put their house on the market on a Friday, and by the end of the weekend, they had 15 offers, the majority of which were above their asking price. So, it's just a crazy thing to think that this is happening only eight years after the financial crisis.