Two Housing Rules of Thumb That Can Get You into Trouble

Follow Rick on Twitter: @RickPalaciosJr

We still hear two housing industry rules of thumb that make us cringe:

• 5% is still a great mortgage rate.
  
  
• Anything less than 6 months of supply is healthy.

First of all, the mortgage payment is what matters, not just the interest rate. As shown in the map below, home prices have risen to be so high that many markets of the country already have a huge affordability problem at a 4.7% mortgage rate.

Secondly, technology has shattered the balanced market months of supply conventional wisdom, shaving roughly two months off the time required to sell a home. Homes can enter escrow today within 24 hours of listing, compared to prior periods when it took at least 30 days for the first open house. For a refresher on why we think roughly 4 months of supply is the new buyer/seller equilibrium, see our May 2017 piece Permanent Tech Disruptions to Home Sales.

Currently, resale listings are rising while the pace of home sales is falling. As a result, months of supply has risen from a cycle low of 3.2 in December 2017 to 4.3 as of August 2018 (most recent national figure). So why is this important? If we’re right, nationally we’ve already entered the early stages of a buyer’s market. Should supply levels cross above five months we’ll be watching for flat, possibly declining resale prices in some markets, especially where affordability is already very stretched. As shown by the alarming amount of red below, that’s a lot of housing markets.