Is a Bubble Forming?

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During the last month I’ve been out and about, and in the many conversations I’ve had, six people have asked me if I think the Salt Lake real estate market is becoming over inflated.  A couple people told me they were thinking about selling their home and renting for a couple years to play it safe.  A couple other people said they have been thinking about buying, but are wondering if their opportunity has passed.

My response to this question has been similar every time, “the market is strong and will continue to be strong for the next few years”, and then I give a little supporting evidence to support what I believe.  What can I say, I’m an optimist.  I must admit though, the more the question was asked, the more I wanted to dig in and form a better opinion on this complex topic.

There are a lot of factors to consider.  Some of the big picture factors are interest rates, inflation, national and global economics and security, the price of oil and natural resources and the value of the stock markets.  There are also many local factors, like unemployment, an abundance of good paying jobs, the cost and availability of labor, materials and land for new construction, net migration in, demand for homes by first time buyers, specific demand for certain neighborhoods and price ranges and the amount of equity people have in their current homes, to keep the market fluid as people want to move.

Salt Lake County home sales, inventory and median price

First, I’d like to address the downside risk to the Salt Lake County housing market by looking at what’s happened in the past.  Below is a graph of the second quarter results for single family homes in Salt Lake County all the way back to 1998.  The three factors on the graph include, the median price of a single family home in blue, the number of homes listed for sale in green and the number of homes sold in black.  During the last nineteen years, the value of Salt Lake County homes has only declined during the great recession, from 2008 to 2011.  Every other year, the median price of homes in Salt Lake County has increased.  So the downside risk seems minimal to me, especially for entry level and mid-level homes.

Next let’s look at inventory levels on the graph above for Salt Lake County single family homes.  Take a look at the gap between homes sold and homes listed.  In the second quarter of 2007, the number of homes listed was 8,216 and the number of homes sold was 3,506 sold.  The ratio works out to 42.7% of the homes sold compare to homes listed.  During the recession, that percentage was 39.1% in 2008, 50.6% in 2009, 59.1% in 2010 and 56.3% in 2011.

Now let’s look at the percentage of homes listed to sold in the years following.  I’ve done the calculations.  In 2012 70.2% of homes listed sold, in 2013 68.3%, 2014 63.2%, 2015 73.0%, 2016 72.4% and 2017 72.3%.  If you look at prices during this period of time, you’ll see that the least amount of appreciation since the recovery began was in 2014 when the ratio was the lowest at 63.2%.

I’d say this is a reliable indicator to measure the local housing market by, and one I will continue to track, but the bottom line is inventory remains tight and home values will likely start cranking up again next spring because there’s no reason for a glut of homes to suddenly be listed for sale.

Interest Rates and the cost of home ownership:

Cost of home ownership goes up with increasing interest rates.  The Federal Reserve has already increased the short term rate four times since December 2015, and now they are considering a slow divesting, possibly as soon as next month, of the $4.5 trillion dollars of mortgage and treasury backed securities they are holding.  There is also a chance that Federal Reserve Chairman Janet Yelen may be replaced.  Her term is up February 3, 2018 and the decision on wether to retain or replace her is made by President Trump.

With the Federal Reserve slowly increasing interest rates and beginning the process of divesting it’s mortgage backed and treasury securities, it seems that interest rates could rise.

A rise in interest rates causes an increase in the cost of home ownership.  If we look back at the homes sales graph above and look at the cost of home ownership in 2007, when the median home value was $256,000 and the 30-year mortgage rates was at 6.66% and compared it to the second quarter of 2017 when the median home price was $330,000 and interest rate was 3.9%, and assume buyer’s put 10% down, the cost of the median home in 2007 was $1,480.61 (Principle & Interest) vs $1,400.85 in 2017.

Keep in mind that these are not inflation adjusted numbers, so the cost today is still quite a bit lower than it was in 2007.  If we adjust for inflation, the 2007 payment is $1,480.61 x 1.1793 = $1,745.55.  We have to go back twelve years to 2005 until the value adjusted for inflation falls below the current payment.  In 2005 the median price of a home was $188,000 at an interest rate of 5.58% with a payment of $969.21 x 1.252= $1,213.45, adjusted for inflation.

If you want to just compare the median value of a home in Salt Lake County in 2007 adjusted for inflation to 2017, the value would be $256,000 x 1.1793 = $301,900.  The actual median value was $330,000 second quarter 2017 and $300,000 in 2016.

History of 30 year mortgage rates:

Inflation Adjustment Calculator:

New Construction:

Sales of new construction homes in the U.S. fell 9.4% in July 2017 according to the Wall Street Journal.  Home builders like to build homes with the greatest amount of profit which means bigger homes on smaller lots, which presents a challenge, because a large portion of the buyers can only afford smaller entry level homes.

I couldn’t find the same statistic for the state of Utah on single family home sales for the month of July, but I did find some other stats that are worth noting from the “Ivory-Boyer Construction Database, Kem C. Gardner Policy Institute at the U of U”.  In the state of Utah, the value of residential construction, which includes single family homes, condos and apartments, increased by 17% in the first quarter of 2017, and the number of building permits increased by 35%.  This significant increase was driven by a 84% increase in the number of multi-family units being built.  The number of single family homes increased by just 4%.  The areas with the highest dollar amounts of residential construction are listed below, and all of them are in either Salt Lake or Utah Counties:

The Cost to Build:

The cost to build has increased as the market has been booming.  The high cost of land in the areas that are in demand, the increasing cost of building materials and a shortage of skilled labor have all played a part in this.  Gypsum (drywall) cost were up 9.9% in July 2017 compared to July 2016, and lumber prices have risen due to recent tariffs placed upon Canadian soft wood lumber imports.

The cost of building materials will likely continue to rise due to Hurricane Harvey, that just hit Texas and Louisiana.  The storm is being compared to Super Storm Sandy and Hurricane Katrina in the amount of damage it has caused, and is said to have effected 6.5 million people.  Much of the damage is the result of flooding from the massive amounts of rain the storm delivered.  That’s a lot of homes and other buildings to repair and replace.

In Salt Lake County, nearly all the land on the east side is all built out leaving the remaining land surrounding the Mountain View Corridor as the last area to build on.  The next big open tracks of land are on the west side of Utah Lake and Tooele County, but without a good mass transit system to those areas, it’ll be hard for that growth to be sustainable with so many vehicles already on our roads.

With that in mind, the areas where you can’t build without tearing another building down would seem to be the areas that would show the greatest appreciation.  Especially for the entry level homes that are in such short supply.

Local Population growth & pent up demand:

Net migration into Utah was 24,000 more people coming in than leaving in 2016 and Utah had the highest population growth in the nation at 2.0%.  There is a high demand for entry level homes in Salt Lake County and a low supply.  There are a lot of reasons for this.

Elderly people tend to stay put in their homes after their home is paid off, and people in Utah tend to live a long time, 80.2 years on average (#10 of 50 states).  Also, rents have increased significantly in the last decade and as a result, many of the small single family homes have been turned into rentals due to the attractive cash flow scenario.

There are also a lot of people staying put in their entry level homes that would like to move up or down, but because many people have to sell in order to buy, and in a hot market it’s difficult to find a seller that will take an offer that is contingent upon the sale of their home, they stay put because they don’t want to move twice.

The National & Global Economy:

According to the Wall Street Journal article, “Growth Takes off Around the World 8/24/17”, all 45 countries tracked by The Organization for Economic Cooperation and Development are on track to grow this year and 33 of those countries will grow faster than last year.  This doesn’t happen very often.  The last time was the late 1980’s and before that was in the early 1970’s.

The current economic expansion has been going on for 100 months according to an article in the Wall Street Journal “More Sunny Days Are Likely Ahead for the U.S. Economy, 8/17/17”.  The current economic expansion began in June 2009.

The longest economic expansions in the U.S. was 120 months, from 1991 to 2001 and then there was a eight month recession as the tech bubble burst, followed by more expansion.  The article goes on to say that there is no sign of our current  expansion slowing down in the near future and that economic down turns typically have a cause, they don’t just fizzle out.

Common causes are over tightening of monetary policy by the Federal Reserve to fight inflation or a shock in the price of oil, like what happened in the mid 1970’s.  Inflation has been very low this year and was at 1.7% in July 2017.  Oil prices for July 2017 were at $48/barrel.  However, over the last week Hurricane Harvey hit Texas and Louisiana hard and caused oil companies to shut down some refineries, resulting in about a 15% decrease in capacity of American oil production.  This will push the price of oil up which will contribute to inflation moving forward, and that could result in higher interest rates.

History of the price of a barrel of oil:

History of U.S. inflation rates:

Current US Inflation Rates: 2000-2024

My opinion after further consideration:

I think the downside risk for the value of single family homes in Salt Lake County is minimal at this point, and I expect that the median price of homes in Salt Lake County will continue to rise in 2018 due to the continued high demand for and shortage of available housing.  The global and local economies are strong right now and net migration in to Utah is robust.  Interest rates are still at historical lows, but there is likely to be increasing inflation moving forward in the cost of oil and building materials due to Hurricane Harvey.

If I was considering buying a home, I’d start looking now as the market goes into the natural slow down of the fall and holiday season.  If I was considering selling, I’d be making plans to get my home on the market in the spring of 2018 when prices will most likely be rising again.

If you or anyone you know has any questions about the local real estate market, or needs help buying or selling residential real estate, I’d love to help!  95% of all the business I do comes from past clients and the people that they refer to me.

Have a fun and safe Labor Day weekend!

Kevin Coyle
Realtor  Broker  MBA  CRS
SLC Homes
M: (801) 243-0699


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