Is the housing boom creating a dangerous bubble? In every boom-and-bust real estate cycle – and there have been a lot of them – experts have suggested and consumers have believed that the boom they were seeing, unlike all the others, would not be followed by a decline. And every boom-bust cycle in the past has proven them wrong.
Analysts are making the same ‘this one is different’ argument about the current boom, which has persisted despite pandemic forces that have dragged other sectors of the economy down. They see the same frenzied buying activity that preceded previous market busts, but they also see critical differences that, they contend, will prevent a market collapse like the one that produced the Great Recession 15 years ago. They cite two key differences:
- Underwriting standards are stricter, reflecting a combination of regulatory requirements and the caution of lenders who were burned badly by the last downturn and aren’t anxious to repeat that experience. “A lot of the people who are buying today ... are among the most creditworthy in the history of mortgage lending,” Reggie Edwards, an economist at Redfin, told The Hill. Lenders offering funky mortgages (remember ‘liar loans’?) enabling buyers to purchase homes they couldn’t afford, produced the foreclosure tsunami that felled the market in the last bust, Edwards noted. But buyers today are making large down payments. “They’re putting so much cash up front, I don’t think we have any concerns that people can’t afford the homes they’re buying now.”
- There is no hint of the speculative building and speculative investing that produced an over-supply of homes, glutting the market and triggering a downward price spiral when the buying frenzy stopped. The problem in the market today isn’t a glut of homes but a dearth of them. Competition for homes among people who can afford to buy them is pushing prices up – a market-driven, reality-based supply-demand dynamic that, analysts say, will support continued growth.
Solid but Harmful
But the current dynamic – rising prices and a shortage of homes available for sale – isn’t an unalloyed benefit. It is creating challenges for most prospective buyers and serious affordability barriers for those at the entry level.
“If you’re an entry-level housing buyer, [rising prices are] a problem,” Federal Reserve Chairman Jerome Powell told reporters recently.
Daryl Fairweather, chief economist for Redfin, echoed his concern. “I’m not worried about a housing crash,” he told The Hill, “because these sky-high prices are supported by the new reality of well-funded buyers…but I am concerned about how we as a society are going to reckon with just how expensive housing has become. We have our work cut out for us when it comes to ensuring homeownership is attainable for middle-class Americans with good jobs and money saved up, not just for the wealthiest among us.”
Home prices, which have soared throughout the pandemic, show no signs of slowing. The S&P Core Logic Case-Shiller home price index increased at an annual rate of 12 percent for the year ending in February, up from 11.2 percent in January and the second highest annual increase in more than 15 years.
Listing prices for homes available for sale in February increased by more than 17 percent setting a new record for data the NAR has compiled since 1999. Inventories were almost 30 percent below year-ago levels, reducing ‘days on market’ to a meaningless term as homes sold almost as quickly as they were listed. Homes spent an average of 18 days on the market in March, the fastest selling pace the NAR has ever recorded.
After posting their strongest annual performance since 2006 last year , existing home sales have slowed, recording back-to-back monthly declines in February and March. Pending home sales recovered a bit from a two-month swoon, managing an increase of just under 2 percent in March, indicating continued strong demand hampered by an increasingly scant supply.
“The softening sales activity is not due to demand going away. Demand remains strong,” said Lawrence Yun, NAR’s chief economist. “It is the lack of inventory that is hindering the sales activity.”
New home sales bounced back in March, increasing by more than 20 percent compared with February’s cold-weather impacted rate. But new home inventories are as skimpy as their existing-homes counterpart, declining for the 19th consecutive month in March despite a recent increase in new construction activity.
Housing starts increased almost 20 percent year-over-year in March to the highest level since 2006. But chronic under-production has created a deep hole. Buyers turning to new homes to avoid bidding wars for existing homes are finding long waiting lists and rapidly rising prices. Redfin reports that builders in some markets are compiling waiting lists “90 buyers deep” for the homes they are constructing. Some builders are reportedly canceling contracts with buyers who refuse to accept price increases resulting from the rising costs of labor and building materials.
Still, strong buyer demand and expectations that the economy will continue to rebound as the pandemic recedes are boosting builder confidence. Permits for new construction reached a 15-year high in March, rising nearly 30 percent above the year-ago level.
A Deep Hole
While the prospect of more homes on the market is welcome, the NAR’s Lawrence Yun said, the inventory relief it promises won’t be immediate. “After 13 straight years of underproduction,” he said, “the construction boom will have to last for at least three years to make up for the shortfall.”
The market doesn’t just need more homes, it needs homes buyers can afford to purchase, and that is going to require both low (or at least relatively low) interest rates and slower price gains. Neither is certain.
The discouraging April employment report (employers added only 266,000 jobs, far short of the 900,000 or more analysts were expecting) blurred the interest rate outlook, leaving analysts divided on whether the weak labor report was a blip or the beginning of a trend. If the latter, the Fed will face less pressure to boost rates to counter inflationary pressures; if the former, a near-term rate hike becomes more likely.
Whatever the rate trend, soaring building costs are likely to keep upward pressure on home prices for the next year or two, at least, exacerbating affordability concerns.
Buyer confidence in the current housing market, measured by Fannie Mae’s monthly housing survey, turned decidedly negative in April, suggesting that the listing shortage and rising prices have begun to take a toll. Are we nearing a point at which inventory and affordability constraints will dent the demand that has been driving this housing boom? And if that occurs, will this boom-bust cycle begin to look increasingly and distressingly familiar?