The rapid increase in home prices has garnered headlines across the country and has affected our industry in several ways. Using the Case-Shiller US National Home Price Index as indicative, home prices have risen about 15% comparing April 2021 with the prior April (the latest numbers available). Colorado and Texas home prices have risen, in-line with national averages, at roughly 15% year-over-year, while Arizona prices have risen about 22%.
We do not believe that home prices are as stretched as they were in 2006, rather we believe they are well supported by the structural demand created by millennials purchasing homes and further aided by the temporary effects of pandemic driven changes. Housing production in Phoenix has failed to keep pace with population growth. These demand issues have combined with a significant lack of new builds over the past decade to drive price increases. Contributing to the current rapid price rise was a lack of sellers; they are now coming back, driven by the elevated prices and some additional comfort with interacting with the public. Foreclosures should start to come online as well, although at a very moderate historical level and the percentage changes can be safely ignored as the base is so low. With increased attention being paid to inflation, it should be noted that home price appreciation has lagged broader measures of inflation for some time but is now closing some of that gap. Finally, home prices are seasonal, rising more rapidly in the summer months and we expect this year to be no different. Indeed, lumber prices have come well off their recent highs seeming to confirm this expectation. The conclusion is that we expect the rate of increase to be unsustainable at an annual rate of 15%, but overall prices should continue to rise, albeit at a slower rate more likely in the 5% range.
Home renovation and rehabilitation have recently been receiving more focus. The Neighborhood Homes Investment Act “calls for the creation of a new federal tax credit that will produce new equity investment dollars for the development and renovation of 1-4 family housing in distressed urban, suburban, and rural neighborhoods.” This is a developing initiative, and we expect significant similarity in coverage areas with Opportunity Zones – these are economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. As discussed before, we expect that these areas under consideration for coverage by the Act, with its focus on twin tails of urban and rural, will be places of potential growth.
The drivers of the need for rehabbing houses remain well supported. The average home in the United States was built almost 40 years ago and not in move in condition regarding either aesthetics or condition and the increased demand and interest are welcome.
by David Neilson, Boomerang Capital Partners
1 https://fred.stlouisfed.org/series/ CSUSHPINSA