Meredith Whitney, a noted real estate consultant recently interviewed on CNBC’s Squawk Box, said American homeowners have a record amount of equity in their homes. The average Loan-to-Value (LTV) of mortgages has dropped to 30 percent, which means they have 70 percent equity in their homes.
She asserted, therefore, there is little to no chance of another busted housing bubble as happened in 2007 that led to the Great Recession. Many economists see the real estate sector as a leading indicator of what may happen next to our economy. It could mean there is even less of a chance that a recession may occur this year if it is based on a collapse of real estate values as happened in 2007.
“The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic,” reports CoreLogic Chief Economist Selma Hepp. “Also, while homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity.”
The U.S. housing market is short more than 300,000 affordable homes for middle-income buyers, according to a new analysis from the National Association of Realtors® and Realtor.com®.
“Middle-income buyers face the largest shortage of homes among all income groups, making it even harder for them to build wealth through homeownership,” said Nadia Evangelou, NAR senior economist and director of real estate research. “A two-fold approach is needed to help with both low affordability and limited housing supply. It’s not just about increasing supply. We must boost the number of homes at the price range that most people can afford to buy.”
Households have another leg to stand on despite rising interest rates. The net worth of U.S. households rose by 2 percent in the first three months of the year to $148.8 trillion, putting it close to a record high and suggesting the economy might have enough fuel to keep growing or at least to avert a steep recession, according to the Federal Reserve’s flow of funds report.
Most of the increase in net wealth in the first quarter was tied to a rebound in the stock market. The value of equities held by households jumped by $2.4 trillion. The ING graph shows the actual increase in the orange bars above the blue line pre-COVID trend.
Household debt increased at a 2.2 percent annual rate in the first quarter to $19.2 trillion, marking one of the smallest increases in the past decade. Debt had grown as fast as 8 percent as the U.S. emerged from the pandemic, said the Federal Reserve.
Meredith Whitney in another Barron’s interview, said reviving the housing sector from its current slump means finding housing for Gen Z’ers and the second half of millennials that don’t have money. How are they going to become homeowners?
The construction industry is trying to help. Calculated Risk’s Bill McBride reported recently that there are 1.675 million units under construction, just 35 thousand below the all-time record of 1.710 million set in October 2022.
Of these, there are currently 977 thousand multi-family units under construction. This is the highest level since September 1973, and close to the record of 994 thousand in 1973 (being built for the baby-boom generation).
So builders and home seekers are seeing that the alternative to buying is renting and that has to make up the difference until more affordable housing is constructed.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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