You have to admit, as consumers in the US, we are pretty spoiled.
Whenever we want something, we expect an abundance of choices readily available. And of course, when we’re shopping around for the best deal and the highest discount because who would ever pay full sticker price, right? That’s how it works.
Now, imagine the following scenario, you need a new phone, so you go to the phone store and you find out there’s already 30 people there that want to buy a phone. Then the manager comes out and says, “All right, everybody, listen up. We have one phone for sale today. It already has a couple of scratches. It comes with an auto charger and we’re going to sell it to whoever makes the highest and best offer here. You should also know that we prefer cash, large bills only, no change, and we need the phone for our own purposes until next week Thursday, so if you could pick it up then at 4:30.” And this is pretty much how the real estate market works right here in Milwaukee in the spring of 2021.
If you think now this is totally crazy, let me assure you, you are not the only one. A lot of people are asking me if I think this is a bubble and if the market is going to crash anytime soon. Now, nobody can predict the future. But what I can tell you in today’s video is how we got here, what are the circumstances that are driving the market, and then by the end of this video, you can make your own informed decision if you think it’s better to buy right now, or if you should maybe wait for the market to correct.
I’m sure you know somebody who is currently in the market and trying to buy a house, and you have heard those stories and about the frustration and maybe even the utter disbelief about what’s currently going on. There’s almost no inventory, houses selling very quickly within one or two days and multiple offers. So they made an offer quickly, probably over asking price, and all they heard back is they didn’t get it. They had a pile of offers and they chose to sell the house to somebody else. No feedback whatsoever why they did not choose their offer. So this is very, very frustrating. And all they could do is go back, look on MLS, find another house that they possibly could consider and go through the same scenario again, write another offer, this time probably higher and in the hopes that it might work out.
So how did we get here? Because this is not normal. At least not for a state like Wisconsin. Maybe out in California, we’ve seen that in the past. What most people don’t realize, the market that we have today didn’t happen just overnight. This was a slow progression over the last five or six years. You actually have to go back to 2015. That was the last time we have seen a balanced market here in the Greater Milwaukee area. A balanced market means about five to six months worth of inventory worth of supply on the MLS, which translated back then to about 14,000 houses that were for sale at any given point of time. So buyers had lots of choices, 14,000 houses. Now, in 2020, just before the pandemic, we were down to less than 5000 listings on the MLS and everybody was screaming for inventory and worried that the market would seize up because inventory is so low. And guess what? Since last year, we have lost almost another 50% of the inventory. We are down to about 2,400 listings that are currently on the market for sale.
I want you to be very clear on the fact that this is not something that happened overnight and came out of the blue. Real estate markets tend to move very slowly, and this is a development that we have been monitoring since 2015. Every single year, the market has been shifting a little bit more to what’s in favor of the sellers. Inventory got a little bit lower, prices got a little bit higher. It just never made the news until now. And Milwaukee is not the only market that is experiencing an extreme inventory shortage and prices going up. This is a nationwide phenomenon. And on average, all the 50 states in the US have lost about 52% with the inventory in the last 12 months.
It is also interesting to notice that despite the fact that Milwaukee prices have been going up for the last several years, every year, we are still one of the more moderately priced markets in a national comparison. When you look at the top 100 Metro areas ranked by price, Milwaukee is coming in fairly late at position number 61, which means that about two-thirds of the Metro areas in the country are more expensive than Milwaukee currently is. And maybe that is the reason why we are so competitive and we’re currently ranked in one of the top 10 most competitive markets in the country.
All right. So we’re very low on inventory and this is what’s defining the current market. Real estate markets on the very highest level, a driven by a supply and demand. There’s also other factors that are coming into play. For example, interest rates, elections, unemployment rate, the general state of the economy, market sentiment, et cetera. But on the highest level, it comes down to demand and supply. How many willing buyers out there and how many sellers or how many houses are there currently on the market?
So let’s examine that question a little bit. Why is there not more inventory out there? And where is inventory generally coming from? This is very easy because there’s only two main ways that additional inventory can become available in a market like Milwaukee. Number one is houses are becoming vacant either because the owner is passing away or because the owner is moving out of the market or out of state. The other way is new construction. Those are the only two ways that additional inventory is made available to the market. Because if somebody is selling a house and then buying a house that’s a net zero, that’s a wash.
The issue is that both main sources of inventory, which is vacancies and new construction, have been lower over the last decade or so here in the Milwaukee area than we have historically seen. So there’s not a whole lot of people moving away from Milwaukee, unlike what we’re seeing in Chicago, for example, where a lot of people are trying to move out of the city or even the out of Illinois altogether. And the other thing is that older generations tend to live longer and healthier, so they’re staying in place, fortunately, good for them you have to say, but houses are not becoming vacant on the same rate that we have seen historically. So we don’t have that many vacant homes.
What about new construction? Shouldn’t new construction be a source of inventory? Well, let’s take a look at some historic data. You can see on this chart here that new construction in the US peaked out at about 1.8 million homes per year. That was part of the exuberance that we had in the years leading up to the big mortgage crash back in 2007, 2008. After the crash, a lot of the builders went bankrupt and out of business, which is true also for a lot of the contractors, and we hit the low at about 400,000 homes a year. And when you look at the last 10 years, at the last decade, you can see that production volume has increased every year, which is great for new inventory, but we still have not even ramped up to what we have historically produced every year.
So the issue is, according to a recent article in the Wall Street Journal, as a nation, we are short of about 4 million new construction homes. That is a deficit that we have ramped up over the last decade. Now, when you break that down, that equates to about 80,000 single-family homes here in the Milwaukee area. And according to the Milwaukee Builders Association, we are producing currently about 1500, 1600 new construction homes a year. So that is a far cry from where our production volume actually should be for new construction inventory to really help out with the housing availability. And the other problem is that most new construction homes are actually priced between five and $700,000, some of them higher, and that of course does not really help a first time home buyer.
All right. So next I want to talk about the demand side. Where are all these buyers coming from? Why is this so much demand for housing in the market? And is this even sustainable or is there a chance that this might go away all the sudden? Now, the answer can be found in a shift of demographics. Millennials are now the number one segment of US home buyers. Well over 50% of all homes sold are being bought by millennials. We have a grand total of about 82 million millennials in the US, and they’re also the biggest segment of the US working labor force. Now, it is very important to realize that millennials are not 22 years old anymore. I’m still hearing a lot of these stereotypes. In fact, the oldest millennials are turning now 38, 39 years old. So the big four zero birthday’s starting to show up on the horizon.
Now, this generation is known for doing things sometimes a little bit later in life, but they are definitely getting to the age now where they’re getting married and they’re having babies, and that triggers of course a change in lifestyle. So they are going from being renters to being homeowners. And I don’t think they’re going to go back on that. So until that demand that we’re seeing from the demographic shift is satisfied, I think this demand is going to be sustainable.
So if we break this down to a local level, we have about 300,000 millennials living here in the greater Milwaukee area. And ideally, if they all get married, that makes approximately 150,000 couples. The problem is that we have 150,000 buyers over the next few years facing a market that is selling approximately 10,000 homes every year. So of course, a lot of them are going to continue to rent, but it’s easy to see how we ended up with such an imbalance between buyers and sellers here in the Milwaukee area.
Hey, real quick and before I forget, I love making videos for you guys and I also want you to know how much I appreciate every single question, comment, and shout out that I’m getting in the comment section below. If you’re getting value out of this video, please give it a thumbs up. It motivates me to make another video, and it also helps reaching more people here in the Milwaukee area. With that, back to the topic.
So one of the big questions that is currently highly debated on the internet is whether we are in a housing market bubble or not. When you look currently at the market and you see everything that’s going on with people rushing to buy houses and prices are going up every month, it certainly looks and feels like a bubble. And memories are coming back to the years of 2004, 2005, when people are buying up houses left and right, and builders are adding even more inventory. Remember we had 1.8 million houses produced every year, so we already had high inventory and there was more inventory flooding into the market, and it was cheap and easily available credit that was driving up the housing market back then. And people would use the houses as an ATM being over-leveraged and just taking equity out of their houses in the hopes and in the expectation that prices would go up even more.
So one of the key elements of a bubble is always that there is a speculative element to it. So when prices are not founded any longer on the intrinsic value of a product, when they’re rather driven by speculation and by a market hype, that’s when you’re looking at a bubble. When you’re comparing the market situation that we had back in 2006, 2007 with the real estate bubble with the situation that we have in present day, then you’re looking at a multidimensional problem, and that’s a whole nother video that I would like to make in the near future, but I’ll give you just one thing that is fundamentally different.
So when you look back then at the market situation, we already had a surplus of vacant inventory, of vacant houses that nobody was living in. And at the same time, builders were cranking up supply more and more. We were producing houses on a record level. You’ll remember of 1.8 million houses in one year. And at the same time, we were facing a dwindling demand, and that was kept up artificially with very easily available mortgages that were given to people who should not really be able to qualify for a mortgage.
So today, we have to completely inverse situation. We have very low inventory and not really the means to correct that inventory quickly. At the same time, we have very strong demand that is based on the demographic shifts and changes that we have discussed. And landing standards are very tough at the moment, so people have to really qualify in order to get a mortgage and show the income and be able to really pay for that. So those are some of the differences that are fundamentally different between the bubble that we had back in 2007 and the situation that we have right now.
Bubbles have always a very speculative component to them. So when you are looking at bubbles historically, then you always see pricing that is completely detached from the intrinsic value of a product, good or an asset. And you’re also seeing the prices being driven up by speculation. They’re totally inflated. Now, we’re used to measuring home prices in terms of US dollars and we all have the experience that homes are costing more now in US dollars than they did a few years ago. But there is also another way of determining if you’re in a bubble, and that is by measuring home prices as a percentage of US household income. And when you apply that metric, so when you look at how much does an average household have to spend for their real estate needs, you can see that the historic average used to be around 21%, while we are currently more in a 15% range. So when you look at home prices through that lens, then you can see that we’re actually have quite a bit of room to grow, even just to meet the historic averages.
If you’re thinking right now, wait a second, this sounds like the textbook definition of inflation, then I’m not disagreeing with you and we have to keep a careful eye on this. Now, another way of looking at house prices is by the definition of affordability, and the NAR is publishing a statistic that you can Google. I have a chart here for you, and you can see that when you measure it with an affordability index, that we have right now a lower affordability than we had, for example, in 2012, when real estate prices were super low after the crash and the affordability was at an all time high at 197 points. So in the context of the last 10 years, affordability is less than what it used to be.
But when you apply to context of the last 30 years, then you can see that affordability is still a lot higher than it used to be on average over the last 30 years. So measure it in household income and in interest rates, we have still a very high housing affordability. And also from that point of view, it does not look like we are in bubble territory anytime soon.
Now, when we’re trying to predict the future of the real estate market, there are certain things that we can just not foresee because they’re currently not on the radar. So what are the things that we can see currently? So one of them is forbearance. There is a certain risk when the mortgage forbearance program ends that we are going to have additional inventory. I’m reporting on these numbers in my monthly market updates, so if you haven’t been watching those, then you might want to catch up on that. But we currently have about 2.7 million loans in across the US, and so far things are looking that most of them will have a favorable outcome, although some of them will end up being either foreclosed on or just hitting the market as a regular sale. So that will provide additional inventory, but from everything that we can see right now, that is not enough inventory to really change the dynamic of the market that we’re currently seeing.
Interest rates is another one. So if interest rates are going up, of course, the relative cost of a house, a home payment is going to go up. So that will certainly have a dampening effect on the housing market. But my observation is that people are not making a decision to buy a house based on what the current interest rate is, is evident based in the eighties, when mortgage interest rates were 16, 17, or 18%, like a freaking credit card, but they are making the decision to buy a house based on their lifestyle and on their current needs.
So if millennials are having kids and they feel they need to get out of the rental apartment and need to buy a home, they will do that whether if the interest rate is 3% or 3.5%, or even 4%. Of course, it will have a certain dampening effect, but as long as rates are only changing moderately, which is the best forecast that we currently have, it will not have a huge impact on the demand side of things. Chances are that you’re watching this video because you are trying to determine if it is smart and if you should make a move this year in 2021, or if you should put your house buying plans on ice and maybe wait for the next year and see if the market cools off a little bit, and if prices are stabilizing or even coming down.
I hope that I was able to provide you some data and some information to make that call because at the end, it is a complete judgment call. Nobody can predict the future accurately. We’re dealing in probabilities here. From everything that we’re seeing, it looks like the odds are we are going to see a continuation of the trend that we’re seeing currently. But like I said, nobody can predict the future, and in the end it remains a judgment call.
If you are asking me for my personal opinion, then I would have to say if you have the strong desire to own a home, and if you are financially prepared, if you have a solid financial basis, then I would say there is a good case to be made for an argument to buy home this year and not put it off until next year because there is a good probability that you’re going to pay not only a higher price for the same home, but you’re also going to be financing it with a slightly higher interest rate, so you’re going to get hit with a double whammy.
Thanks for reading!