Soaring home prices are starting to alarm policymakers
The booming housing market helped stave off economic collapse in 2020. But soaring prices are starting to worry policymakers, who fear the market could lock a generation of would-be buyers out of homeownership.
Home prices in January — typically a slow month for the market — were up 14 percent over the same month the previous year, while sales jumped 24 percent, despite an unemployment rate that was almost twice as high. Demand for existing homes is so strong that the average residence is on the market for just three weeks, and inventory is at a record low after seeing its steepest drop last year since the data was first tracked in 1999.
It all threatens to freeze broad swaths of the population out of the market, leaving millions of Americans in a less secure financial position, widening the racial wealth gap and forcing millennials, already lagging previous generations in building wealth and forming families, to fall even further behind.
“The dream of homeownership is out of reach for so many working people,” said Senate Banking Chair Sherrod Brown (D-Ohio). “Rising home prices and flat wages means that many families, especially families of color, may never be able to afford their first home.”
Brown, who insists on calling his panel the “Senate Banking and Housing Committee," vowed that these issues will be a top priority in the months ahead as the country struggles to recover from the pandemic-induced recession. Among other things, he said he plans to work with the Biden administration to address the rising cost of housing and expand access to homeownership “so that more families can rent and own homes in inclusive communities.”
The last time the U.S. saw such skyrocketing home prices, the ensuing crash brought down the global economy. Most industry analysts say the current boom is not a “bubble” akin to that frenzy of more than a decade ago, which led to the financial crisis.
Sure, the pandemic shut down basically everything. But the housing market? It’s kept on chugging along. In fact, prices are soaring.
Still, the current pace of home price appreciation is unsustainable, they say. “I am worried that the price run-up is going to choke off first-time buyers,” said Lawrence Yun, chief economist for the National Association of Realtors. “This simply cannot continue.”
The median price for a home in San Jose, Calif., was $1.4 million in the fourth quarter, a 12.4 percent surge from the same period a year earlier. But some of the largest increases have occurred outside of the most expensive cities, as residents fled crowded urban centers during the pandemic. Prices in Phoenix rose 14.4 percent in December from the same month the previous year, while Seattle saw gains of 13.6 percent, according to the Case-Shiller Index.
How has the housing market thrived during one of the deepest economic slumps in U.S. history?
For one thing, the crisis is unusually lopsided: White-collar employees who can work remotely have for the most part emerged unscathed, with many actually adding to their savings while reaping the benefits of higher stock prices. Historically low mortgage rates — a result of the Federal Reserve’s easy-money policy response to the crisis — nudged some of those buyers off the fence to buy a first or second home, according to analysts.
Meanwhile, a glut of millennials — the largest generational cohort in the country consisting of those born from the early 1980s to the mid-1990s — is reaching the prime age for buying first homes, and regional data suggests the pandemic spurred plenty of them to pick up stakes and head for the suburbs.
But there are simply not enough houses to meet the demographic demand, driving up the price of those houses that are for sale and potentially delaying many other millennials’ ability to become homeowners, the primary way Americans build wealth.
Another concern is that a potential spike in mortgage rates as the economy recovers could leave borrowers who rushed to buy when rates were low — and in some cases paid above asking price, given fierce competition for a limited supply of homes — in the lurch. And a sudden drop in home prices would hit sellers who have held off on listing their homes during the pandemic.
“Right now I wouldn’t describe it as a bubble, but that doesn’t make it less concerning,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. With home prices rising at “3 times the rate of income growth, that means we’re going to outrun the buyers out there.”
“I think we could continue at this rate for a couple of quarters before we sort of hit that wall,” Fratantoni added.
At first blush, market activity appears reminiscent of the boom before the 2008 credit crisis. Mortgage balances grew by $182 billion in the fourth quarter of 2020, the biggest quarterly uptick since 2007, according to the Federal Reserve’s latest report on household debt. More mortgages were originated in the fourth quarter of last year than in any single quarter since the Fed started tracking it in 2000, surpassing the previous high from 2003.
But the loans being made today are much stronger than they were then: 71 percent of originations in the fourth quarter of 2020 went to borrowers with credit scores above 760, considered a very strong number, compared with 31 percent of mortgages going to such creditworthy borrowers in the third quarter of 2003.
Strict regulations enacted after the crisis are partially responsible for the change. And major industry players still bear the scars of the meltdown: Yun is not concerned that the heated market will encourage lenders to relax their standards, because for “Wall Street and Fannie and Freddie, it’s fresh in their minds — don’t chase after bad mortgages or stretch people’s budget.” Fannie Mae and Freddie Mac are the government-run companies that stand behind about half the country's $11 trillion residential mortgage market.
And unlike in the early 2000s, when there were too many homes, housing production has been low for years, plagued by a shortage of skilled labor and rising costs of raw materials. Homebuilders expect construction of single-family homes to pick up this year after freezing at the start of the Covid crisis, but lumber prices remain a major hurdle.
The price of lumber is up about 180 percent since April — an increase that works out to about $24,000 being added to the price of the average home, according to the National Association of Home Builders.
Just as supply reached new lows, meanwhile, demand has spiked, with families rethinking what they want from their homes as the pandemic pushed everyone inside.
“I think we’ve only seen the tip of the iceberg when it comes to migration,” said Daryl Fairweather, chief economist at Redfin. “There are going to be more people who want to move once they get more clarity on what post-pandemic life will look like.”
Those shifts — what Zillow economist Matthew Speakman called “the great reshuffling” — are taking place against a backdrop of over 70 million millennials reaching peak home-buying years.
“There’s just a huge glut of young adults in the country now that wasn’t there a decade ago,” Speakman said. “The force driving the demand forward is here to stay and should provide more support in the year to come even as the pandemic craziness calms.”
If there aren’t enough homes to meet that demand, though, the largest generation in the country won’t be able to start building equity, which will in turn delay other financial decisions. Despite making up over a third of the workforce, millennials own less than 6 percent of all U.S. wealth, according to Federal Reserve data.
The delays will have long-term societal impacts. Even before the pandemic struck, more than 1 in 5 millennials — 21.9 percent in 2019 — lived with their parents, up from 11.7 percent in 2001, according to a Zillow analysis of census data. Partially as a result, millennials are significantly behind previous generations in forming families.
And Black and Latino Americans — who are twice as likely to rent as whites and more than twice as likely to report being behind on housing payments during the pandemic — could see the barriers to homeownership increase in the wake of the crisis. Renters behind on payments will face hits to their credit scores and potential eviction once the crisis passes — making it more difficult to rent their next home and more expensive to eventually buy one.
Most analysts expect home prices to continue to increase this year, even as gradually rising mortgage rates temper demand a little bit. But it could be years before the supply of housing can meet demand. In the meantime, millions of people will find themselves priced out.
“One wonders what is the end game, how does this play out given the heated market conditions of too many buyers, multiple offers?” Yun said. “As prices simply outpace people’s income by a large margin, people won’t qualify to get a mortgage.”