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The Home Price / Income chart below has recently been used by a number of bears to point out that US home prices are overvalued. One analyst has even created a 100-year version of this chart.
To conclude that home prices are overvalued using the chart above, you would also have to conclude that mortgage rates don't matter and mortgage underwriting hasn't changed. Over the period shown above, mortgage underwriting terms were as follows (I am estimating some of this, since data was not collected):
Good luck finding a new home to buy in Southern California these days-the supply of new home projects open and selling in Southern California is currently at a 20-year low. Cautious capital, a lack of finished lots, and notoriously slow planning departments are all contributing to a serious deficit of new for-sale housing in the region.
There are currently just 419 actively selling new home projects in Southern California. In comparison, the market has averaged 1,045 actively selling projects annually over the last 20 years. In peak years, there have been over 1,600 actively selling projects. The current supply is 60% below the long-term average and 75% below peak years.
The number of active projects in Southern California would need to be 2.5 times higher than today just to return to the average of the last 20 years.
New home sales reportedly spiked in October. Huh?
Builder stocks spiked right after the Census Bureau release Wednesday morning, and we are sure that many believe we are in a strong housing market again because of the headlines. On Fox Business, I explained what is actually going on. We discussed:
- The data quirk behind the simultaneous release of plunging September sales followed by a return to a more normal trend in October
- 444,000 sales being just more than half of normal new home sales
- The missing entry-level buyer
- My anticipation for low homeownership due to the tremendous disincentives to lend to the credit-challenged borrower