The US housing market is on fire right now.
In April 2020, the median home listing price reached an all-time high of $375,000. Compared to last year, prices have increased by 17%.
Many market watchers are curious to know how long this housing boom will last. Will the market crash, or will price appreciation stabilize and reach a closer equilibrium with wages?
The answers tie deeply to broader macroeconomic conditions, so they warrant closer inspection. But first, let’s examine how we got here.
A Changing Landscape in the Housing Market
It’s safe to say that COVID-19 has drastically altered housing preferences, especially in the US.
From a wave of home remodeling to real estate speculation to the surge in remote employment, the landscape of housing has been dramatically reshaped.
Everywhere you look there are signs of a housing boom, such as buyers making offers without even visiting the property and lenders offering cheaper home-loan rates and simpler terms to compensate for spiraling housing prices.
The housing boom isn’t riding purely on speculation, however. A great deal of the price appreciation and demand stems from people upsizing and relocating for remote work.
A huge portion of the labor force is moving to the fringes in search of a lower cost of living, but many will spend those savings on enough space for a home office. To put it into perspective, four in ten recent homebuyers work remotely.
Commodities on The Rise
Additionally, we‘ve seen rapidly increasing prices for construction-related commodities, partially due to supply chain bottlenecks. The price of lumber has risen more than 50% over the past year.
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And as lumber becomes increasingly costly, homebuyers must bear higher costs. First-time buyers, in particular, are struggling to keep pace with rising prices.
In a single year, the price of lumber has increased 377%
Active listings on Realtor.com dropped by 52% from May 1, 2020, to the same time this year. Many newly listed homes receive several offers within days and spend on average just 18 days on the market.
Realtors, lumberyards, and finance writers alike are having a hard time keeping up!
Home Prices May Be Temporarily Inflated
In a recent interview, investment strategist Lyn Alden makes a strong case that we are in a period of commodity undersupply as global supply chains get back to normal.
Supply bottlenecks are visible across several industries. For example, there are not enough factories building semiconductors and limited shipping containers on container ships. These supply chain snags are especially prevalent in the lumber industry.
The spike in commodity prices is largely due to specific supply chain issues, which are likely to sort themselves out before long. And when they do, it could lead to a cooling off ot the US housing market.
Parallels in historical housing bubbles
So is this something we’ve seen before? Well, yes and no.
The subprime mortgage crisis of 2008 was largely set off by predatory lending, leading to consumers buying homes they couldn’t afford because mortgage variable rates were so irresistibly low.
After a few years, the variable rates on those mortgage contracts shot upwards, and suddenly people across the board could no longer afford the payment on their homes, leading to a cascade of defaults.
“The key difference now versus during the housing bubble before the Great Recession is that back then, it was easy credit that fueled speculation, not cheap credit,” says Taylor Marr, Lead Economist for Redfin.
“It wasn’t uncommon for buyers to put nothing down and speculate on real estate… This time around, the demand that’s fueling appreciating prices is real—from families, newly remote workers, and companies relocating employees to lower tax, lower regulation states.”
The housing market continues to run hot, and home prices are growing at a fast clip. The Federal Reserve attempts to support the economy by keeping borrowing costs low for shorter-term loans, but the long-term rates have increased, and housing prices will likely keep going up.
The Fed is purchasing close to $40 billion worth of mortgage-backed securities (MBS) every month. The next rate hike likely won’t be until at least 2022.
When supply chains go back to normal, speculators run out of bids, or when the Fed hikes rates or dials back stimulus, it may spell disaster for housing markets and homeowners left with exorbitant mortgage payments.
Most economists agree that housing prices will continue to rise but disagree on how far and how fast. The consensus seems to be that there will not be a crash, but prices will likely flatten out in the coming years.
Housing prices will rise sooner and sharper in some areas than others. Still, much depends on decisions from the Fed and the economy’s ability to normalize after the pandemic.