The real reason for the frenzy in the real estate market
US home prices increased 24% year-over-year in May, the highest increase in more than 20 years. The market is in a frenzy, with some home buyers bidding six figures over asking prices and sellers selling many homes within a week of their hitting the market.
What’s really going on?
It’s not like the last housing bubble, where buyers with poor credit bluffed their way into mortgages, artificially inflating demand. Pundits have noted supply factors including home building that slowed down during the pandemic recession and lumber prices that are sky-high, inhibiting building. This article also cites the millennials who are now entering their prime home-buying ages. And interest rates remain low, which makes the average buyer able to afford mortgage payments on a more expensive house.
I think people are just stir-crazy
Obviously, a lot of consumers suffered hardship during this recession, and a lot lost their jobs. But a lot of others kept getting paid, saved money they would otherwise have spent on expensive goods or vacations, and are now walking around with a nice juicy down payment.
I also think an emotional factor is driving people into the market.
People who spent the the last year cooped up in their houses staring at the walls and dealing with their children as they worked remotely are just in desperate need of a change in scenery. Those that can afford it are looking.
Renters are ready to finally buy that starter home and get out from under the landlord’s stinky apartment.
People with growing families are sick of being cooped up and want more space.
People in parts of the country where homes are expensive are realizing they can cash out of their houses, move to somewhere cheaper, and do the same work remotely.
And older folks with nests emptying are ready to harvest that swelling home value and live somewhere smaller and cheaper.
The pandemic didn’t create all these trends, but it sure helped amp up the anxiety of people with their situations at home, where they spent nearly all of their time for the last year. They’re just sick of their houses. They’re sick of the color of the walls, they’re sick of the things that need repairs, and they’re sick of the smell.
A lot more people are ready to make a change.
I have no concrete evidence for my hypothesis. So I’m turning to you. Are you sick of staring at your home office? Are you itching to make a change?
Or are you too terrified of what’s going on in the housing market to even go near it?
Where we are in Northern New England, we saw a lot of people from out of state, specifically New York, moving up here and buying up the inventory during the pandemic. I think now that things are improving and it looks like remote work is here to stay on many levels, the pinch continues because of that, and because while we’re not personally sick of our house (we just wanted to trade up), it makes sense that a lot of people would be.
Untold story….institutional investment in single family homes is growing rapidly. The insiders I speak with suggest it’s presently ~ 2% and headed towards 10%. Witness this week’s announcement of Blackstone’s acquisition of a large block of single family homes.
I don’t know anything about this. Are they acquiring homes as investments and renting them? Interesting dynamic that I was not aware of.
From everything I’ve read, it’s not as much inflated demand, it’s reduced inventory that is driving the frenzy. Contrary to your notion of people being sick of their houses, it appears that people in droves are opting to refinance and stay put. Mortgage companies have been swamped with refinances more than new purchases. Yes there are the well publicized moves out of high price markets and big cities. But I’m not sure that’s the real trend. My real estate friends say there just isn’t enough inventory. In some cases, available inventory is just 20% of what would be considered a healthy market. One real estate company analysis (second hand info from a friend) found that even at accelerated rates of new housing starts, it could take five years to get back to a healthy balance.
No, it’s low interest driving insane demand. Nothing to do with supply. An absolute fake news meme.
I’d say “all of the above”, depending on, um, location, location, location. A lot of little, seemingly unrelated things can add up to make a big thing. Many of the “little things” we cite were amped up by the pandemic. The irony is that it wasn’t that long ago when the narrative was, “Gee, what’s going to happen when all the boomers want to downsize? They’ll have no one to sell to.” Now we have a new narrative. And in five years they’ll be another one.
For the housing market in California, where I live, my generation (Millenials) and those below me are being priced out, burned out, student debt-ed out… take your pick. I make 75K a year, have paid off the student loans I had, and still can’t afford to make ends meet by living in close proximity to my workplace. My field is, thankfully, specialized enough that I’ve secured a remote work agreement with my employer and will be moving to West Virginia at the end of July… a state I chose because, among other reasons, it has the lowest median house price in the U.S.. This is the only way I can think of to afford a home, let alone have children. So it’s not precisely being ‘stir crazy.’ It’s seeing an opportunity, because of the pandemic, to change working conditions in such a way that allows me and other younger generations to obtain the things we’ve been assuming up to this point that we were probably never going to have.
Firstly, this is a world-wide phenomenon, and is consistent with massive inflation in almost all asset classes across the planet, which is also what many conventional economists have been predicting would be the result of the massive money printing going on in all developed economies (so-called “quantitative easing”).
Because that new money is being put in the hands of the owners of one asset class (bonds), it is no surprise it is being used to bid up the prices of other assets, including real estate.
Secondly, the “Covid lockdown effect”, while a contributing factor, is more readily seen in the boom in house renovations and extensions, much of which seems to be about providing office space where parents working from home can be productively isolated from children forced into homeschooling.
One of the silver linings from the grey clouds of Covid has been the opportunity for many employees to demonstrate they can be just as productive and effective working from home (or at least that any loss in productivity and effectiveness can be offset by savings in renting and equipping old-fashioned offices), so this is likely to be a continuing trend.
Thirdly, there is the trend for ageing empty-nesters, who until recently would have traded their suburban house for some form of “assisted-living” accommodation, to look to paying for help (including aged care and nursing) at the home they know and love, which is temporarily tightening housing supply.