Home prices are spiraling out of control. There are several reasons why prices keep going up, but it can’t last forever. Here’s what it takes for prices to even out.
House prices have risen so quickly recently that many people simply assume that another market crash like 2008 is imminent. This cannot be ruled out, but should such a crash occur, it is not caused by an oversupply of living space.
According to The National Association of Realtors (NAR), the average selling price for existing homes rose 23.4% year-on-year in June 2021, the second highest since January 1999. ” Days “.
The inventory was only 2.6 months (a balanced market is about six). In many places it is much less. For example, in Jackson County, Missouri, where I live, it only lasts just over a month. In April it was only 0.6 months, almost twice as many sales in one month as there were real estate on the market.
This is clearly not a sustainable increase in value. And while this is obviously true, it does not mean that the housing shortage in the United States will go away.
A persistent housing shortage
After unscrupulous lending and low interest rates caused the financial crisis of 2008, banks and builders became squeamish about new buildings.
There were at least 1 million housing starts each year from 2000 to 2007 and at least 2 million between 2004 and 2007. After the crash, the number of starts rose to 500,000 and did not reach a million again until 2020. A rising population has created a persistent housing shortage in the United States.
The problem becomes even more apparent when one looks at future demand for housing and compares it to what is likely to be available. For example, Nerd wallet conducted a survey that found:
“28 million Americans say they plan to buy a home in the next 12 months and about 26 million hope to buy their first home within the next five years.”
In addition, 39 percent “of Americans who had planned to buy a home in 2020 postponed or canceled those plans because of the pandemic or its impact,” which may explain some of the pent-up demand for housing and why prices rise so fast now.
Even so, 28 million is a huge number of people. And when we count the sales for the past year (or years), the numbers are just not right.
In 2020, 5.64 million existing apartments were sold and a further 822,000 new buildings were sold, which corresponds to a total of around 6.5 million sales. In 2019 there were only 6 million in total. In 2018 there were 5.96 million.
Even assuming that each of these 28 million Americans are in a relationship and buy a home together, you still have more than twice as many people looking to buy a home as there are (or likely to be) homes.
House prices can get out of hand, but there are no signs that this housing crisis will end anytime soon.
So will house prices cool down?
The rise in home prices is almost bound to slow down simply because housing is becoming unaffordable for many Americans, despite the fact that the FHA and many banks offer record-low interest rates and high loan-to-value ratios. Corresponding CBS news:
“Home hunters are increasingly being torn out of the real estate business, with home ownership in more than 4 out of 10 counties in the US now out of reach for most people, as a new analysis shows … about 20% compared to last year.”
Wage growth has simply not kept pace with property prices. Unfortunately, many people are likely to settle for rent and give up buying a property for the time being just because property prices are too high.
That being said, inflation is starting to rise across the economy, and it could be a wild card in that equation. In May consumer prices rose 5.4 percent year-on-year and producer prices rose 7.8 percent in July.
For the time being, however, rising inflation is likely to exacerbate the housing shortage, as rising construction costs make profitable construction and sale more difficult.
However, as other consumer goods become more expensive, real estate can nominally become cheaper without home prices ever falling. If the prices of anything else are rising faster than apartments, it can make buying apartments easier. This of course presupposes:
- Wage growth is keeping pace with consumer price increases, which is questionable.
- That the Federal Reserve won’t raise interest rates to fight inflation.
In fact, a sharp rise in interest rates to curb inflation is the most likely means of halting property appreciation.
That being said, the market is unlikely to collapse even if the Fed hikes rates. House prices are likely to cool, but there does not seem to be any end to the housing shortage overall.
Andrew Syrios is a real estate investor and partner in Stewardship Investments and a real estate agent for eXp Realty in the greater Kansas City area. Connect with him on Instagram, Facebook or Twitter.