Research from the Black Knight indicates that the current demand for houses is largely driven by families seeking to purchase homes and not by speculators, which, according to the Urban Institute, means that we are at less risk of entering a housing bubble.
Urban Institute’s analysis of Black Knight’s house price index (HPI) reveals that home prices appear to be losing momentum. In comparison that during the last housing bubble, growth in the investment component of HPI was substantially larger, “reflecting reckless lending and speculative homebuying,” said Andrew M. Neal, Urban Institute Senior Research Associate.
“Investment-driven demand for housing returned in 2012 as buyers with strong credit profiles and deep pockets snapped up millions of foreclosed homes at rock-bottom prices,” Neal said. “Not surprisingly, peak growth of the investment component in 2013 (4.2%) far outpaced the consumption component (2.2%), although to a lesser extent than during the bubble.”
Home prices slowed from 6.8% year over year growth in February 2018 to 3.6% in March, while home prices have hit historic highs in nominal terms. This means the return for investment for homeowners has been small, and a family buying a home at today’s prices will do slightly better than inflation, however, they shouldn’t expect outsize equity gains. Neal notes that with these trends in mind, potential homeowners making the move to ownership need to consider the absolute cost of owning versus renting, including maintenance costs, taxes and insurance, and foregone interest on the down payment. They should also consider that homeownership provides a hedge against future housing inflation or rent increases.
“More importantly, these data should comfort those worried about another housing market crash,” said Neal. “Compared with the 2005–2007 bubble, when the HPI was driven mostly by speculative buying, the HPI today is driven mostly by families wanting to buy homes to live in.”
DSNews
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