Intertwined Forces Driving Housing Market Crazy

The housing market is crazy!  More than one industry professional has reached that conclusion, watching trends that seem inconsistent, if not contradictory. 

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Reports on housing market conditions during the past year have chronicled the disconnect between an economy hobbled by the pandemic and a housing market that seems to exist in an alternate universe, seemingly unaffected by lockdowns, job losses, and economic uncertainty. 

As economic indicators have trended downward, the housing market has seemed to gain strength.

Those trends continued in January.  Home prices increased again, rising 14 percent above the year-ago level, while existing home sales rose by 24 percent year-over year. Pending home sales, a marker for future transactions, declined for the fifth consecutive month, reflecting the dearth of homes available for sale.  Even with that decline, the National Association of Realtors’ (NAR’s) pending sales index beat the year-ago measure by 13 percent. 

Real estate industry executives have been sounding the alarm about the mismatch between the increasing demand for homes and the shrinking supply of available homes for sale. Rising prices, they have warned ─ a result of that imbalance – risk putting homeownership beyond reach for first-time buyers generally, and for lower-income minority buyers in particular.

In a January survey by the National Association of Home Builders (NAHB), more than 50 percent of buyers reported that they had faced bidding wars for properties they wanted, up from 50 percent the previous month.  A Redfin survey found that  more than half the homes listed for sale are going under contract in less than two weeks, with many buyers paying more – sometimes considerably more – than sellers are asking. 

Lawmakers Take Notice

While availability is the major obstacle for many would-be buyers, affordability is becoming an increasing concern for others, a trend that some lawmakers are beginning to notice. 

 “The dream of homeownership is out of reach for so many working people,” Sen. Sherrod Brown (D-OH), chair of the Senate Banking Committee, told Politico.  “Rising home prices and flat wages means that many families, especially families of color, may never be able to afford their first home.”  As prospects for controlling the pandemic brighten, Brown has said he intends to make housing affordability a priority for his committee this year.  

Lawrence Yun, the NAR’s chief economist, says current housing market trends are not only unhealthy – they are also unsustainable.  “I am worried that the price run-up is going to choke off first-time buyers,” he told Politico, adding, “This simply cannot continue.”

While some analysts see hints of the home price bubble that felled the housing market, and nearly wrecked the financial system, two decades ago, most agree that current conditions don’t represent a crisis – at least, not yet. 

Not a Bubble – Yet

 “Right now I wouldn’t describe it as a bubble, but that doesn’t make it less concerning,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, noted in the Politico report.  Home prices are now rising three times as fast as incomes, he pointed out, “and that means we’re going to outrun the buyers out there.”

The concern isn’t immediate, he noted.  “I think we could continue at this rate for a couple of quarters before we sort of hit that wall.” But we will hit that wall eventually, Fratantoni and others are warning, as prices continue to rise. 

There are two cures for the chronic inventory shortage that is pushing prices higher:  More listings  of existing homes for sale and more new construction.  Spring will bring a seasonal increase in listings, the NAR’s Young predicts, offering a measure of relief there, while builders have been ramping up construction of new homes, in response to growing buyer demand.

Although single-family starts fell by more than 12 percent in January, residential permits for new construction increased by more than 20 percent, reflecting rising confidence among home builders.

Lumber Cost Concerns

That confidence is being tempered, however, by soaring lumber prices, which have more than doubled in the past three months, Matthew Speakman, a Zillow economist, noted in a recent report, “and that has reportedly caused some builders to stop some projects mid-way. Land and labor shortages also continue to hinder the ability to take on new projects,” he said.

Robert Dietz, the NAHB’s chief economist, echoed that concern in a recent market analysis.  "Demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower cost markets,” he observed, “but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks. Some builders are at capacity and may not be able to expand production due to these headwinds," he cautioned.

Higher Interest Rates Coming?

Rising interest rates may create another headwind.  Analysts predict that the Federal Reserve will reverse policies that have held the benchmark Fed funds rate near zero to mitigate the impacts of the pandemic, as an improving economy spurs concerns about inflationary pressures.

A change in Fed policies may in fact be in the future, but not in the immediate future, Federal Reserve Chairman Jerome Powell told lawmakers in recent Congressional testimony.  The Fed won’t take its feet off the interest rate brakes, he said, until the economy has recovered further from the effects of the pandemic.  “That is likely to take some time” he said noting that “the economy is a long way [from meeting] the Fed’s employment and inflation goals.” It is ”highly unlikely,” he said, that those goals will be achieved this year.

Housing industry executives are expecting rates to rise “modestly,” but not enough to have a significant impact on the consensus view that home sales will remain strong at least through the end of this year.

The NAR’s Yun doesn’t expect rates to rise “to an alarming level, but we should prepare for a rise of at  least a decimal point or two,” he predicted.

Ruben Gonzalez, chief economist for Keller Williams, agrees that as the economy improves, Treasury rates will rise, pushing mortgage rates higher. “This will likely weigh on demand some,” he told HousingWire, “but the market is currently so supply-constrained it will likely take some time for the impacts on affordability to have a noticeable impact on market conditions.”