A Housing Market Update

Dear Rich Lifer,

There is currently a record-low number of homes available to buy on the housing market. The typical trend in housing is for sales to dip in the winter but rise in the spring as families make moves before a new school year. 

However, we are not seeing this trend play out as fears due to coronavirus and stiff competition for homes continues into 2021. 

The level of homes for sale this February was down 29.5% from February 2020, according to the National Association of Realtors (NAR). Only 1.03 million homes were for sale, marking the lowest number since 1982.

Altos Research, a firm that tracks the market nationwide, reports that there were about half as many homes for sale in the winter of 2020 compared to 2019. 

Altos Research

This chart uses Altos Research data to show how steeply the number of available homes has fallen in a few major cities. 

The Many Reasons Why Available Homes Have Decreased 

One of the main reasons for this drop is due to lack of inventory. Lawrence Yun, NAR’s chief economist, remarked, “It is not that demand is disappearing from the marketplace. It is really the lack of supply.” 

So why are people so scared to sell homes right now? The answer is complicated. 

“The supply side is really tricky,” said Benjamin Keys, an economist at the Wharton Business School at the University of Pennsylvania. “Who wants to sell a house in the middle of a pandemic? That’s what I keep coming back to. Is this a time you want to open your house up to people walking through it? No, of course not.”

Most American homeowners are in the baby boomer generation or older, and these groups are at a heightened risk of contracting coronavirus. And their reluctance to sell their homes or downsize makes it harder for younger families to level up. 

Professor Keys describes the process as the “property ladder,” which comes with many questions for older Americans such as: 

“Can I commit to a forever home when the future of remote work remains unclear? Do I really want to move out of my home and into assisted living when Covid is such a high risk, especially in those environments?”

This reluctance has had a ripple effect on the market as a whole, according to Ralph McLaughlin, the chief economist at Haus, a housing finance start-up. When supply is limited, sellers get skittish about finding their next home and back out of the market, leaving potential buyers with fewer options. It’s a bit of a vicious cycle. 

Another reason there are fewer homes for sale has to do with mortgage forbearance due to the pandemic. At the peak of the pandemic, more than four million homeowners with government-backed loans were in mortgage forbearance. Now, 2.6 million still are in forbearance, and this policy has been extended through June.

Of course, this policy has helped millions of families who have lost their income due to the pandemic, but this also means some homes that may have come on the market because of a foreclosure or forced sale have not. 

However, it would appear the current state of the housing market is not completely the fault of the pandemic… 

We Can’t Just Blame the Pandemic 

Even before the pandemic, real estate agents and economists had fears regarding an inventory shortage. 

For more than a decade, fewer houses have been built compared to historical averages. The housing crash of 2008 essentially destroyed the home building industry, pushing many construction workers into other jobs.

Additionally, former President Donald J. Trump’s policies negatively affected the housing market. His strict immigration policies restricted labor supply, and his tariffs pushed up the price of building materials.

All these factors contributed to a decline in newly-built homes, which is what the housing market desperately needs right now. 

Lawrence Yun, the chief economist for the National Association of Realtors, simply notes that a new house on the market means no one has to move to free up space; it only increases supply. 

The past decade of low interest rates has also resulted in homeowners staying in their homes for longer periods of time to keep their cheap mortgages. Low interest rates also encourage homeowners to use real estate as an investment opportunity, buying new homes without selling the ones they already own. 

Michael Simonsen, the C.E.O. of Altos Research: “Right now it’s a screaming good deal to have two properties: When my mortgage rate is 2.7 percent, why not have two of them?” 

Simonsen continued to point out that over the past decade, the number of single-family homes in the rental market grew by more than seven million. Most of these single-family rentals are owned by individuals, not big investors. Even further, companies like Airbnb have made it easier to make revenue off of investment properties. 

This has resulted in rent prices dropping and home prices increasing…

Rent and Home Prices Fork

The below graph shows the way home prices and rent have diverged over the past 10 years. 

Click here to learn more

Economists normally expect both prices to rise and fall together, but when they begin to split, it’s usually a sign of the housing bubble inflating. 

Jenny Schuetz, a researcher at the Brookings Institution, notes, “I don’t think we’ve seen a housing market quite like this one. And other recessions looked a little bit different, so that makes it hard to know what’s going on.” 

The main reasons for rents falling can be attributed to the pandemic: laid-off workers moving home, college students moving home, low-interest rates attracting people to buy instead, and lack of new renters in cities. 

These rental-market circumstances make the home-owning side even harder to understand. The ratio of home prices to rents in many metros is now as high as it has been since the housing bubble. And according to NAR, the median existing-home price rose 15.8% in February from a year earlier to $313,000.

However, Mark Zandi, the chief economist at Moody’s Analytics, says he isn’t yet anxious about a pending disaster such as the 2008 housing crash. What worries him is the fact that many first-time and moderate-income homebuyers are being boxed out of the housing market because of rising prices. 

Can This Be Fixed? 

Building more homes and adding inventory to the housing market is clearly one of the best ways to return to a healthy housing market, but it could take years of work to even things out.

Increased vaccination rates could give baby boomers the confidence needed to move. Ending mortgage forbearance periods in June could also put more houses on the market, but conversely, displace millions of Americans. 

All this to say, if you are waiting for a spring surge in homes for sale… you may be waiting much longer than anticipated.

To a Richer Life,

The Rich Life Roadmap Team 

 

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