Housing Market Status May 2021
What is the housing market status at present? The news contains story after story on the housing market and home prices. Like any good story, media hypes it over and over and over as if every story was Armageddon. Does the hype paint a true picture of the market or does it panic the crowd into FOMO without reason?
Home supply and home demand differ by geography. However, present buyer demand points upward. The upward demand causes many to balance an opinion of bubble versus solid fundamentals. Housing supply prior to Covid was tighter than what has been normal over the past two decades. The supply became artificially high in the boom prior to 2008 and reversed as a result of 2008. Fundamentals seemed to support the market prior to 2008. But it turned out artificially created demand resulted from loose and lax mortgage standards promoted by the federal government through FNMA and FHLMC. A flood of homes hit the market after 2008 from borrowers who never really could afford the house purchased during the government promoted targeting of poor credit borrowers.
2011 and the Rise of Corporate Buy to Rent Firms
After 2011, demand began returning, but much came from large private equity groups buying homes for rental. This segment of the market never existed as a corporate entity before. Owners investing in homes and renting them traditionally were small operators. Overall demand from buyers wasn’t the leading force it had been. Many young people chose to put off buying a home. They rented or stayed with parents instead. The job market had been impacted severely and employment remained less than robust. Then the number of existing homes for sale, relative to the adult population, fell to half the previous record lows. Those lows were set in the 1990s and early 2000s.
Covid
Then came COVID-19. City dwellers went looking for larger homes, often at a safer distance from the crowds. Renters found buying outside the core city to be less expensive then renting within the city. Or the geography changed with a move and housing options grew. Recently, bidding wars have driven up home prices at 15%-20% annual appreciation rates for the last year. Rural/suburban price growth outpaces urban price growth.
Driving the demand once again is the federal government. The Federal Reserve drove rates to the bottom reacting to shutdowns across the economy. Relief bills passed now flood the US with cash and keep the printing presses for currency running constantly. Much of this cash has flowed into cryptocurrency and the stock market, building a sense of wealth across most income groups. Cryptocurrency already has reached bubble territory. The stock market displays many bubble characteristics, but the lack of alternate investments props up the valuations. This unintended boost accelerated drastically during the pandemic.
Federal Reserve Manipulation Increases
As central banks flooded money into the credit markets, rates on 30-year mortgages, which had been falling for decades, plummeted. Record low rates — under 3 percent – resulted in 2020. The housing market status went from balanced to red hot. Refinancing led the way, but purchases heated up as work from home allowed locational choices.
Traditionally, at least back to the 1970s, housing slumped during recessions. But interest rate manipulation by the Federal Reserve was more limited. This time, as in 2008, the Federal Reserve coupled rate manipulation with historic purchase of bonds and mortgages. So, the Federal Reserve makes mortgages much cheaper, then buys them with money printed by the US Treasury, making interest rates even more inexpensive.
Buyers and Investors Act Based on the Information Available
There is little sign of a letup now. Who doesn’t like an historically cheap mortgage interest rate? Many buyers are looking at homes as a speculative investment, not shelter. Perhaps half of prospective U.S. buyers lose out to higher bids. The phenomenon is worldwide, not confined just to the US. The federal government actions bolstered excess savings. Changes by credit bureau scoring models have boosted average credit scores. Inflation usually follows such easy money and credit. What is the traditional haven during inflation? Real estate. Many buyers have expressed buying as an inflation hedge.
Additionally, the federal government is advocating another round of massive spending increases. Should this occur, a likely result will be a continued jump in housing prices with money flowing like an open fire hydrant. By the end of 2022, this likely creates a cascade and subsequent crash. Caution is a key to keep in mind with a watch on Congress and spending bonanzas. The current proposed spending, if enacted, would likely create flat to downward pressure on home prices in 2023 and the following years. This may not be as sudden as 2009-2010, but may take a longer horizon to fully occur.
Risks to the Current Housing Market
The possible end of easy mortgages would quickly stop the housing market appreciation dead in its tracks. Federal Reserve comments and indicators point to this event not in the cards for 2021 and early 2022. We explore this opportunity in our Advantageous Purchase Window Forecast. Prospective buyers can read Winning Mortgage, Winning Home for more tips and guidance.
Caution should be the word for all purchasers if prices continue to rise at the current pace. Increasingly, economic crises have been preceded by a run-up in prices for housing or stocks or both.
Housing poses a particularly big threat. When home prices hit a bust, the correction may not be noticeable at first. 2008 indicates this. But the pace accelerates as it did in 2009 and 2010. Because it takes time to unravel the bad mortgage debts, the ripple grows and lasts. Eventually, it runs through the middle classes, lengthening and deepening a resulting recession.
Recently, New Zealand implemented a requirement that its central bank assess the impact of monetary policy on housing price stability. At present, the Federal Reserve doesn’t have a similar mandate or it would adjust its policy and mortgage purchases. With such a mandate, it would nudge the Federal Reserve to wind down rescues earlier to avoid bubbles.
2023 and Beyond
What does the outlook for 2023 look like? One can only speculate. However, confluence of many factors appears imminent. The Federal Reserve will tighten. The Federal Reserve will be selling assets instead of buying assets, putting downward pressure on prices and upward pressure on rates. The CFPB has been ratcheting back any looser rules which helped buyers purchase homes (appraisal rules, QM/ATR rules, etc). Shrinking of FNMA and FHLMC by FHFA accelerates. Reducing the roles of the three largest purchasers or mortgages in the US (FNMA, FHLMC, Fed) happens simultaneously. Inflation jumps. Federal government binge spending slows. Foreclosures accelerate as the hardest hit borrowers in forbearance finally face payments and unaffordable loan workouts.