Housing boom unlikely to end anytime soon
Despite a decline in home sales, low mortgage rates and tight supply suggest the boom will continue.
After a year of strong performances, recent data on the housing market have turned people’s expectations upsidedown. According to the Census Bureau, new home sales in July were down 28% from their peak this year, while the National Association of Realtors, or NAR had reported on four consecutive months of declines in existing home sales, or EHS before ticking up again in June and July. Alarmed commentators took these data as evidence of the “end of the housing boom.”
A look beyond the headlines suggests a different outlook for the housing market. While the home-buying frenzy was bound to decelerate at some point from its peak levels, given ultra-low mortgage rates, extremely tight supply, and fundamental shifts due to work from home, the current boom is likely to stay.
Analysis from Evercore ISI states home builders “are selling homes later in the construction process.” Given the fast-rising home prices, builders can expect extra revenue by simply holding their inventory a month longer. Thus, the pace of new home sales is not necessarily indicative of weakening demand.
There is another side to the NAR’s numbers. Compared with prior months and even late 2020, demand is down. But one needs to consider that housing demand in 2021 started at a historically elevated level. In fact, when compared with the same month in 2019, the last year unaffected by the pandemic, which was in itself the strongest year in home sales for many years, the NAR’s EHS was up 11% in July. The recent softening from its peak could reflect a drained supply of existing homes, which now is as low as one month when measured against current demand.
This robust demand is confirmed by strong home price growth. According to the AEI Housing Center, national home prices in July when adjusted for quality increased 16.4% compared with last year, which is 2.5 times the average rate from 2012-2019. Nevertheless, some media tried to spin these strong numbers as the end of the housing boom: An 18% year-overyear increase in median prices in a recent Redfin study was misconstrued into a 0.2% percent median price decline from June to July, which, however, reflects a mere normal seasonal decline rather than the market reversing course.
On the contrary, the AEI Housing Center predicts home price appreciation, or HPA, to remain at double-digit levels into 2022, as structural changes to the housing market may give the boom staying power. Studies have estimated that perhaps up to 20% of the U.S. labor force could continue to work from home after the pandemic ends, which is up from around 5% before it. That equals an additional 24 million workers, who are mostly highincome earners. Since they are no longer tied to jobs in expensive coastal areas, they are now free to move to less dense areas with larger, newer, and less expensive homes — all while pocketing a handsome windfall.
While this is great for people fleeing high-priced coastal metro areas, the inflow of these high earners, in addition to ultra-low mortgage rates, have driven up home prices in smaller and still relatively affordable metros in the Midwest, South, and Southwest. In Phoenix, one of the top destinations for California refugees, home prices have increased 30% since the beginning of the pandemic. Were this trend to continue for another year or two in these areas, homeownership will become even more out of reach for many prospective first-time homebuyers.
The country needs more homes. Restrictive zoning laws have kept homebuilding from keeping up with demand. One solution is to allow for moderately higher densities around walkable commercial areas.
While today’s housing shortage won’t be fixed overnight, media stories about the “end of the housing boom” distract from the real danger of worsening housing affordability. If policymakers continue to ignore this issue, places like Phoenix, which used to be affordable, will soon have vanished from the country. Sissi Li is a research analyst at AEI Housing Center.