No immediate relief from soaring house prices
Looking to buy a home but think house prices are going crazy? You are not wrong. Home prices are skyrocketing across the country, posting their biggest annual gain since 2005. Existing homeowners are adding to their real estate holdings, while younger, less wealthy, non-white buyers face limited supply and demand. increasing costs.
Pressure on house prices is felt across the country. According to the Case-Shiller Index, single-family home prices rose 13.2% nationwide in the year ending March 2021. That’s nationwide, from Omaha to Miami , not just for specific hot urban markets.
Metro markets show the same pattern in Case-Shiller data: a 12.3% gain in the New York subway (slowing prices in Manhattan was offset by higher prices in the suburbs), 13.4 % in Los Angeles and even 12.3% in Detroit. The hottest markets? Seattle, up 18.3%; San Diego, up 19.1%; and the country’s leader in metros, Phoenix with an annual increase of 20%. (Phoenix isn’t just hot in terms of temperature, even though it is setting new heat records.)
So what is driving these awards? Harvard’s Joint Center for Housing Studies (JCHS) has a good checklist of what drives and doesn’t drive up prices.
Unlike some previous housing price spikes, the rise in prices cannot be blamed on tight labor markets. Although unemployment continues to fall as the economy recovers (largely thanks to President Biden’s stimulus policies), May’s 5.8% rate was still well above the low of 3.5. % before the pandemic in February 2020. And Heidi Sheirholz of the Institute for Economic Policy notes “we still have 7.6 million fewer jobs than we had” before the pandemic recession.
You can’t blame general inflation either. When all prices rise steadily, housing can be dragged along with it. But even with inflation rising in May, many economists (along with the Federal Reserve and other policymakers) see no inflationary threat in the long run. The May bump is more likely due to temporary supply chain bottlenecks and other one-off factors that arise as the economy emerges from the pandemic.
As economists in the Biden administration explain, these types of increases are “base effects” – relatively large percentage increases that occur when “the base, or the initial month, of a growth rate is unusually low or high “. We are now one year away from the pandemic-induced virtual collapse of the US economy, so the artificially low baselines of last year mean that we are now seeing large, but possibly transient, increases in the US economy. inflation.
Finally, unlike the 2007 housing crisis that dragged the entire economy into the Great Recession, lax credit and lending standards were not the reason for the high prices. At the time, poor lending standards and lax regulatory policy created a rickety tower of bad debts that ultimately collapsed. As shown graphically in the book and movie The big court, buyers speculated on house prices, fueled by lenders’ abandonment of prudent lending policies and inadequate government oversight.
In contrast, recent data from the Fed shows that “homeowners’ equity in their homes” is now at its highest level – 67.3% – since 1989. Home values have grown much faster than debt, so many homeowners are in a less risky financial position.
If these factors don’t drive up prices, what are they? First, low interest rates, which means low mortgage rates. A recent survey of real estate lenders found that 30-year mortgages stood at 3.16%, down from 3.43% a year ago. Mark Fleming, chief economist at First American Financial, says that “anything below 3.5% is, by any historical standard, an incredible mortgage rate.”
Second, there is a serious lack of housing supply: more and more buyers, armed with very low mortgage rates, are looking for a limited number of homes. The National Association of Realtors says the country has “near historic lows” in the number of homes for sale, “down 28.2% from a year ago.” Many millennials are in the housing market, often for the first time, and are finding less housing on offer.
So with the high prices on offer, why aren’t there more sellers? Keep in mind that sellers always need affordable housing, and there are reports that potential sellers are worried they won’t find one in the overheated market. Unless they downsize or move to a cheaper area, that’s a real worry.
But reluctant sellers are not the only reasons for our lack of housing supply. Over the past decade, the United States has built little new housing, even as our population grows and millennials enter the housing market. My next blog will delve into our lack of housing construction and what we can do about it.
But its sobering news for current home buyers – there is no immediate wave of new homes to come that will change today’s lack of supply. Price increases may slow down, but they are unlikely to be reversed.