The Housing Market is Bananas

News & Commentary

Jul 23, 2021

Housing prices have never appreciated faster in modern history than they have in the last year. Whether you are in the market to buy or sell a house or not, chances are you have heard a story from a friend or family number about how crazy it has been. The surge in home buying is not just anecdotal though; data across the country backs it up. Here are just a few of eye-popping stats for context:

  • In May, the median sales price for existing homes crossed $350,000 for the first time, which was over 24% higher than it was a year prior
  • In a recent survey, a whopping 63% of home buyers reported making an offer on a home without seeing it
  • Over half of houses that are being sold are going for over the asking price
  • Over 75% of homes that are put on the market are being sold in less than a month

In short, it’s fair to say it is a seller’s market. There are a lot of reasons for this, most of which are supply and demand based. At a high level, the main drivers have been well-documented and are pretty straight forward:

  • In the decade following the 2008 Financial Crisis and leading up to the pandemic, many fewer homes were built as the excesses of the housing crisis evened back out (less new supply came online during this period).
  • Covid-19 lockdowns brought millions of new buyers into the market as people grappled with the pandemic, saved a lot of money they couldn’t spend, and reconsidered commuting and the work-life balances they want moving forward (demand reached levels never seen before).

While the pandemic certainly brought more home buyers into the market, this does not tell the whole story. To understand the economics of the housing market you need to understand two factors: demographics and interest rates.

Let’s start with demographics. According to the U.S. Census, there are now over 4.5 million more people from the ages of 30-39 in the country today than there were in 2010. A further breakdown of the census by investor Ben Carlson (who has done some of the best writing I have seen on this topic) found that the most populous ages in the country right now are between the ages of 25-35. If you are wondering why every house you looked at had 15 offers by the next day, this is a big reason why. There are a lot more people entering their prime earning years where household formation becomes a focus. The pandemic simply sped up the process for many.

It is not a surprising that the huge cohort in the 30-39 age group is having such an outsized impact. While baby boomers and other generations bought houses and started families in their twenties, nowadays this is happening a little later. Many millennials put off home ownership longer following the financial crisis for several reasons. It became harder to get a mortgage without pristine credit and solid income as regulations were tightened, more people had to deal with student debt loads, and many chose to live in big cities and rent while getting married later. These are just a few factors. The main point is that while plenty of parents have enjoyed jokes about how millennials would never leave their basements, it looks like they finally have.

Right now, there are millions of potential new home buyers who want to buy a very limited number of homes. Housing starts, or the number of new houses being built, have not really increased due to supply costs, but the impact of building wouldn’t be seen in the short-term anyway. Add in the fact that older generations are staying in their homes longer, and you have a supply shortage. Given these demographic factors and the lack of supply one can make the argument that a major correction in prices may not be coming any time soon.

The second factor is interest rates. Put another way, how much does it cost for people to secure a loan to buy the house they are interested in. The lower the interest rate, the less your monthly payment is. So, buying a more expensive house becomes easier. This is how low rates have indirectly pushed housing prices higher. While interest rates have been low relative to history over the last decade, the pandemic brought new meaning to the word “low” when it comes to borrowing costs. Right now, it is possible to get a 30-year fixed mortgage at less than 3% for many borrowers. The Federal Reserve has been intent on keeping interest rates low through the emergency policies it put into place in March of 2020, which has helped add fuel to a historically hot market. Many experts are asking if this is still necessary. Allianz chief economic adviser Mohamed El-Erian recently said “It is very difficult to argue with any foundation that this red-hot housing market needs continued support in the form of monthly Fed purchases of mortgage securities.” If interest rates were to move off of these historic lows, would this impact people’s appetites for buying?

Buying a house is one of the biggest financial decisions someone can make, and housing is also one of the largest and most important parts of the American economy. The good news is that while housing prices have skyrocketed, many of the problems from the last housing bubble seem to be being avoided. Last time the housing market crashed, there was rampant lending to people who couldn’t afford it and teaser rates people didn’t understand. This has given way to lending to people with sufficient income and high credit scores. Historically low interest rates have made monthly payments as a percentage of income lower than ever. Still, while cycles have similar patterns, rarely do the same factors serve as catalysts to a downturn twice. Prices rising this high this fast have left many potential home buyers with their heads spinning. Given its importance to individuals and the economy, many are wondering where the housing market will go from here.

Citations

Redfin, Housing Data Center, 2021

Why We Can’t Build Our Way Out of This Housing Market, Housingwire.com, Logan Mohtashami, June 7, 2021

Logan Mohtashami on this year’s hot housing market (podcast), Housingwire.com, June 2021

Demographics Are Destiny in the Housing Market, Ben Carlson- A Wealth of Common Sense, June 20, 2021

Has There Ever Been a Worse Time to Be a Homebuyer? Ben Carlson- A Wealth of Common Sense, May 28, 2021

Real-Estate Frenzy Overwhelms Small-Town America, Candace Taylor- Wall Street Journal, May 20, 2021

Housing Starts Muddling Through, Logan Mohtashami, Logan Mohtashami.com, June 16, 2021The Biggest Differences Between Now &

The Housing Bubble, Ben Carlson- A Wealth of Common Sense, July 15, 2021

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