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.

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This podcast was recorded on Dec. 5, 2016.

Gaby Lapera: Not only is unemployment down, butconsumer 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 startputting 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 wasone of the biggest bubbles in the history of the United States ofAmerica, 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, likeLas 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 apicture of a very robust economy.

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

Maxfield:That is such a great question, Gaby. Let me tell you why. This isactually something I've been thinking about a lot.I live in Portland, Oregon,and there's something really interesting going on in thePortland, Oregon housing market. The wayhousing 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. Butif 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, inmajor metropolitan areas, the supply will be right around six months' worth of demand. It canfluctuate above and below that, but it won'tfluctuate 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 themortgage 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 thingcoming 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'reprobably going to see the supply open up a little bit,because these people will then feel comfortableselling 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 thedynamics that are at play, foranyone trying to figure out what's going on there.

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

Maxfield:I don't remember. I can't tell youexactly where I got that 1.5 months' worth number. It's just been in the local news here overthe 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 friendscome 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 acrazy thing to think that this is happening only eight years afterthe financial crisis.

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