The U.S. housing market, already strong before the pandemic, has heated up to record levels in 2021.
The Case-Shiller U.S. National Home Price Index, measuring home prices in 20 major metropolitan areas, reported a 12-month increase of 18.6% in June 2021, the largest yearly gain in data going back to 1987. The National Association of Realtors reported that the national median price of an existing home was $359,900 in July, down from $362,800 in June, which was the 113th consecutive month of yearly price increases. The June to July price relief was due in part to increased supply, with total inventory of new and existing homes increased 7.3% month-to-month but still down 12% from a year ago.
The housing supply has been low for more than a decade. The housing crash devastated the construction industry. A variety of factors, including labor shortages, tariffs, limited land and restrictive permit processes have kept supply of new homes below historical averages, placing more pressure on existing homes to meet demand. The pandemic exacerbated labor problems leading to supply chain issues and high costs for raw materials. Demand exploded despite the economic downturn. With the shift to remote work and education, many people with solid jobs looked for more space, and low interest rates made higher prices more affordable.
At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home.
Refinancing at low rates offered an appealing alternative and kept homeowners in place. Government mortgage forbearance programs have helped families from losing their homes but also kept homes that might have otherwise foreclosed off the market.
Health concerns also played a part with the pandemic making it less appealing to have strangers entering a home for an open house, and older people who might have moved to assisted living were more likely to stay in their homes. Taken together, these factors produced a perfect storm of low supply and high demand, driving already high prices, further still.
Recent inventory gains have been primarily in more expensive houses and there continues to be a critical shortage of affordable homes. A common formula for home affordability is to multiply income by three. A study of 50 cities found that home prices in the second quarter of 2021 were, on average, 5.5 times the local median income of first-time buyers. The lack of affordable housing for first-time buyers also helps to drive rents higher. People with higher incomes who might be buying homes are willing and able to pay higher rents.
Rents on newly signed leases in July were 17% higher than the rent paid by the previous tenant. Occupancy of rental units hit a record high of 96.6% in July.
The housing market has always been cyclical, so it’s likely that prices will turn down at some point in the future. From 2006 -2012, the housing market plummeted 60%.
Mortgage requirements were made much stricter after the housing crash and homeowners today are more likely to afford their home and have more equity.
Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market.
There are more single-family homes under construction than at any time since 2007, but it will take months or years for these to increase the housing supply.
The housing market tends to be seasonal, with demand dying down in the fall and the winter, but that didn’t happen last year. With supply/demand tension easing, the seasonal slowdown may be more significant this year. The Federal Home Loan Mortgage Corporation (Freddie Mac) projects that home prices will grow by 12% in 2021, lower than the current pace, and drop further to 5% in 2022.
Although national trends reflect broad economic forces, the housing market is fundamentally local. The West is the most expensive region, with a median price of $508,300 for an existing home, and the Midwest the cheapest at $275,300.Within regions, there are dramatic price differences among states, cities, and towns.
The trend to remote work, which helped drive prices upward, may help moderate prices in the long term by allowing workers to live in more affordable areas.