America is going down a horrible spiral from the pandemic, causing housing prices and rent to skyrocket and become unaffordable.
For both homeowners and renters, the situation is only going to get worse from hereon. Fundamental policy issues like funding and tax credits for affordable housing construction, responsible modernization of the Community Reinvestment Act, and reform of our housing finance system play a significant part in both these challenges and potential remedies.
Why is there is a sudden increase in housing prices? Simple
Supply and Demand
Far too few homes have been built for the number of people who want them, according to a report released by the National Association of Realtors, a lobbying group.
The U.S. built on average 276,000 fewer homes per year between 2001 and 2020 compared to the period between 1968 and 2000, according to the report which was covered earlier by the Wall Street Journal.
To make up for the shortage, the NAR report says the U.S. would have to build 2.1 million homes each year for a decade—more than it built each year during the housing boom of the mid-2000s.
The supply shortage became especially acute in the past year. Builders slowed construction in some regions last spring and delayed land purchases because of the Covid-19 pandemic. In addition, low mortgage interest rates and an increase in remote work led to a surge in demand for single-family housing. And many homeowners delayed or canceled plans to list their homes for sale.
Even building material prices have gone up, Lumber price has gone on another run that's starting to look a lot like the historic run we saw last spring. The market price is back up to $1,111 per thousand board feet. That's up 186% (or almost triple) above its bottom price. Caused by covid lockdown on factories.
Until recently, the possibility of a bubble wasn't widely supported. But after looking at housing markets across the US, the Fed researchers said new evidence is emerging.
"Our evidence points to abnormal US housing market behavior for the first time since the boom of the early 2000s," the researchers wrote. "Reasons for concern are clear in certain economic indicators ... which show signs that 2021 house prices appear increasingly out of step with fundamentals."
Many Americans are still scarred by the last housing crash in 2007, which was fueled by cheap credit and lax lending standards that resulted in millions of homeowners owing more on their homes than they were worth.
The FOMO effect can drive up prices and heighten expectations of higher prices ahead. That can create a self-fulfilling prophecy, researchers said, in which price growth can become exponential.
The consequences of housing market exuberance can include overpriced homes, investments based on distorted expectations of returns, and reduced economic growth and employment.
The cycle is interrupted when policymakers intervene, spurring investors to become cautious and causing the flow of money into the housing to dry up. This could cause a housing correction or possibly even a bust, according to the WSJ.
Decline in Black Homeownership
African Americans now have a lower homeownership rate than they had when segregation was legal. It's a startling reality that reflects hundreds of thousands of American hopes that have turned into nightmares for families.
Black homeownership already lags that of white Americans. In 2019, the homeownership rate among black Americans was just 42.9%, and lower than the rates for white, Asian, and Hispanic Americans. African-Americans are also significantly more likely to be low-income renters.
In neighborhoods that were once redlined, home prices are still lower to this day. A 2018 study from Zillow, found that a home located in an area given a “hazardous” rating in the 1930s is still only worth 85% of the median value of a home in a nearby, non-redlined neighborhood.
The business of ibuying -- in which a company buys a home for cash to slightly fix it up and resell it again -- is only 1.7% of the national housing market in the last quarter of 2021, according to Zillow. But in some cities, the share of homes going to ibuyers is as high as 11%
Tricon Residential is a Canadian real estate company. The company invests in single-family rental and multi-family rental homes and owns about 31,000 properties across the United States and Canada. As of February 2021, the company had about $8.2 billion of AUM.
These companies buy directly from the builder in a bulk deal, These deals can be worth around $20 -$30 Million. These companies usually focus on single-family rentals, an industry that is becoming more competitive as institutional investors rush to an asset class that was long dominated by small investors. It also comes during a housing boom fueled by the Covid-19 outbreak, which has driven up prices beyond the means of many would-be homebuyers.
Covid Affect on Housing Market
House prices have behaved very differently in the aftermath of the COVID-19 downturn than they did in the aftermath of the last recession due to a variety of causes.
In comparison to the Great Recession, current home and financial system financial conditions were significantly stronger, and countercyclical macroeconomic policies aimed at mitigating the consequences of the pandemic downturn were implemented faster, more forcefully, and more broadly.
These initiatives kept housing prices from falling due to recessionary pressures. Instead, a combination of lower interest rates, income support, pandemic-related increases in demand for home offices and single-family houses, supply limits, widespread mortgage forbearance, and eviction moratoriums drove up housing prices. The advance was aided by renewed prospects of price appreciation in the future.
A lot was learned from the last housing crash, which has led to better early detection and warning indicators of housing bubbles, the researchers wrote. If these concerning trends continue, banks, policymakers and regulators ought to be better equipped to quickly react to avoid the most severe, negative consequences of a correction. Hopefully!