As you can see prices have increased substantially but not going out of control as they did in the early 2000s.
Another factor in today’s strong market appreciation is that we are not in a surplus housing market like we were back then, but a deficit housing market.
Again as an example of past history, in 2004 we had 3.9 months of housing inventory, 2005 5 months, 2006 6.4 months and 2007 9.6 months; where a normal market has 6-7 months of inventory. This caused the blowup of the housing market as more and more inventory came onto the market. However, in 2017 we had 4 months of inventory, 2018, 3.7 months, 2019, 3 months and 2020 2.1 months.
You can easily see that right now there is no housing bubble. Historically low interest rates have caused price increases way above the inflation rate of less than 2 percent.
Another factor in why the market is not overheating is that new construction, especially on Long Island, is considerably less than from 2005-2010 increases where there was excessive building as the market demand was sliding. We have had 13 years of construction that has been lower than the 50-year average as per the Census bureau.
Here on Long Island especially in Nassau with the continued lack of land to build on, prices will continue to increase until there is either less demand or increases in interest rates, thereby pricing more and more out of the market.
There are those who are in a position to buy and knock down the existing home to build a new one. As mentioned in last week’s column Suffolk had a 23+ percent increase in prices; as there is a greater supply of land to build upon in that location.
Prices are considerably lower there which is another reason for even greater demand having more families moving in that direction. Obviously, the 400,000-plus who left NYC in 2020 greatly assisted in the amazing sales increases during the 3rd and 4th quarters as it put pressure for price appreciation to be double digits out there.
For many, higher prices have not discouraged them from purchasing. One reason is that their wages are higher than during the run-up in prices back in the early 2000s and interest rates are half of what they were back then.
The percent of median income that was needed from 1985-2000 was 21.2 percent, in 2006 it was 25.4 percent and today is 14.9 percent. This has added to the pent-up demand for housing which was acerbated by the Covid-19 Pandemic, which exploded the demand in the last 2 quarters of 2020.
Also added to the mix are those families and singles that continue to enter the market every year who are income and creditworthy. Mark Fleming, chief economist for First American, explains,
“Lower mortgage interest rates and rising incomes correspond with higher house prices as home buyers can afford to borrow and buy more. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded house-buying power in 2006, but today house-buying power is nearly twice as high as the median sale price nationally.”
Today, over 50 percent of homes have over 50 percent equity and are on much more solid ground than back 15 years ago.