Baffling ups and downs of housing market

Last year I wrote a column about the current real estate cycle. As I pointed out then, we had no historical examples of appreciation running that high, inventories that low, and market times that short. It seemed to me then that we were experiencing unsustainably explosive appreciation in the Philadelphia collar counties. But looks now like I mischaracterized this when I called it a “moment.”

For more than two years we have continued to live through the only precedent we have for this kind of market, but that has not stopped me from trying to find clues from previous real estate cycles to gain an understanding of when and how this cycle will end.

While the Global Financial Crisis became headline news in late 2008, real estate prices started flagging in 2006, presaging (and precipitating) the collapse. Between 2006 and 2008 most people in real estate believed prices were still going up, in spite of the evidence.

I track the mean and median prices for Chester County (where I do most of my work), and I examine other market indicators every time I write an appraisal. Just as in the broader economy, the data is a mixed bag. Over the last few months, I have seen a slight increase in market-time and inventory in some local sub-markets, and even a slight cooling off of prices in isolated townships. Anecdotally, the appraisers that I work with have reported that financing related orders (purchases and refinance) have been slowing down. In Chester County, there were about 20% fewer closings in the second quarter of this year for single-family homes compared to a year ago.

But the price trend is still radically positive. Even as these other indicators start to show tiny signs of weakening, average prices leapt up 3.1% in just the second quarter of 2022 (and this is following a oneyear jump of 11.3%).

It is difficult to tease out a single, major cause in this trend, but in economics it always comes back to supply and demand. Employment remains at near-record levels. Interest rates, while rising this year, remain relatively low. Meanwhile — although it can seem like houses are sprouting up like mushrooms everywhere you turn — the total number of housing units rose less than the population between 2010 and 2020.

We all have to live somewhere, and if it costs more to live here, then we either have to pay the higher housing prices or commute. Both of these put pressure on wages, which in turn increases costs of locally produced goods and services.

The most straightforward way to address the hyper-appreciation of real estate is to add supply. While this would be aimed more at easing future real estate cycles, we would need to start acting soon. But this strategy requires three things that are vanishingly rare: smart development, willing neighbors, and developers who will build affordable housing.

The other option is to make this region a worse place to live so people will stop trying to move here. I am not as fond of that strategy, though.