The American housing market was a bright spot through the economic calamity of 2020. As other economic problems rose due to COVID-related lockdowns, the housing market seemed to dwell in an alternative reality, with average single-family home prices up 13% compared to end-of-2019. This overheated market, mixed with the economic depravity in so many other areas of U.S. life, has observers wondering whether we are headed for a crash, a la the Great Recession. There are arguments for and against this position.
The case against a crash
There are all kinds of indicators that the housing market—marked by a whopping $350,000 median sales price—will not crash. Interest rates remain low, and Federal Reserve Chairman Jerome Powell suggests that any increase will be gradual; he has called for at least two rate hikes by 2023, but the timing and extent of the increases are unclear, while the Fed has resisted hikes this year despite obvious signs of inflation.
That too will likely increase home prices: inflation has increased throughout 2021 to 5.0% in May, the highest since July 2008. It is projected to increase at just over 3% by year-end. A weakening dollar almost certainly contributes to higher home prices; inflation spikes the price of materials (see lumber), and spurs investors to park their money into real estate as a hedge. To that end, prominent real estate funds like the Vanguard U.S. REIT are trading at high-double-digit or triple-digit multiples, suggesting high interest in this sector. This excessive financialization, in hand, further pushes up home prices.
COVID has furthermore increased purchasing of larger, more expansive homes. According to Robert Dietz with the National Association of Home Builders, markets that are predominantly single-family (as opposed to multifamily properties, which are typically rentals), are growing. This is based on the NAHB’s Home Building Geography Index.
“The county-level second-quarter HBGI data shows relative growth in lower-density markets that represent half of all single-family construction,” Dietz told Sun Gazette Newspapers in September.
Housing market analysts at Cushman & Wakefield argue that workers have been able to remain productive while working remotely, and remote work is likely to continue even as offices reopen. This means the shift to suburbs and exurbs may continue, as will renovations to add home offices.
That would increase the price of labor, lumber, and other expenses that go into home construction—and further increase prices. America’s sawmills, anticipating slowdowns and needing to comply with social distancing requirements, temporarily shuttered at the onset of the pandemic. But demand for lumber did not decline, and the sudden scarcity drove up prices. Compounding this situation are high tariffs on Canadian lumber. Perhaps some of these labor and material shortages will work themselves out in the long-run, but it seems like for the rest of 2021, at least, they will play a role in increasing home prices.
But perhaps the main issue—one that extends beyond any given news event or business cycle—is the constraints on home supply. Urban and suburban communities alike face widespread NIMBYism, limiting how much housing is built. The supply pipeline never really did recover from the recession; housing starts are about half of what they were pre-crisis. This government-caused shortage renders non-existent any sort of market equilibrium, where supply levels meet demand. Until the inventory problem can be solved in a deeply structural way, home prices will continue rising in America.
The case for a crash
When the U.S. economy began to implode in the mid-2000s, a key cause was the overheated housing market. Lending standards had been loosened, causing irresponsible mortgage underwriting and hyper-liquidity. When borrowers proved unable to pay these loans and foreclosed en masse, it sent ripples through the financial system. The federal government has since reinstated tougher standards via the Consumer Financial Protection Bureau.
“Risky loans were common prior to the market crash,” said San Francisco-based realtor Julie Upton to Better Homes & Gardens. “These days, lenders are very strict when qualifying buyers, and changes to appraisal laws have also tightened up the appraisal practices. Taken together, there are fewer risky mortgages in the financial system.”
Still, some see parallels between the Great Recession and today’s housing market. In May, one of the developers of the Case-Shiller index, Robert Shiller, predicted a modest correction. But he also stated that the market is dealing with “aspects of a bubble.”
“This is not a market that collapses overnight…It’s less short run volatile than the stock market. But you can see that we’re seeing price increases now that haven’t quite been realized since those years just before the financial crisis,” Shiller told Yahoo.
The strongest argument for a crash may be that America’s underlying economic fundamentals do not seem healthy. Government debt is rising. GDP declined in 2020. The unemployment rate is still 5.8%, and the workforce participation rate continues to decline, now sitting at a dismal 61.6%. COVID caused an estimated 200,000 extra business closures.
Home prices have already increased at an abnormally fast rate, and one has to wonder how much longer the market can absorb that when so much of the U.S. population struggles.
With that said, I do not expect a housing market crash, but a correction—and even that may be far off. The Fed’s easy money policy, while bad for America’s long-term economic prospects, will likely keep the market inflated in the near-term, and the chronic housing shortage will keep prices ever-increasing in the long-term. This historically-hot, post-pandemic housing market we are in is set to continue.
[This article was originally published by the Independent Institute.]
Scott Beyer owns and manages The Market Urbanist.
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