US home prices rose 18.8 percent in 2021, according to the S&P CoreLogic Case-Shiller US National Home Price Index. During the first three months of 2022, home prices continued their upward trajectory. According to the National Association of Realtors (NAR), the “median existing-home price for all housing types was $ 375,300, up 15.0% from March 2021 ($ 326,300), as prices rose in each region. This marks 121 consecutive months of year-over-year increases, the longest-running streak on record. ”
Despite surging home prices, there are growing concerns about the overall health of the US real estate market, including the pace of sales in recent months amid fast-rising mortgage rates and continuing supply shortfalls. Recent analysis by Redfin suggests that at least some homebuyers have moved to the sidelines. About 54 percent of homes still sell above their list price.
Given the outsized role of the housing sector in the US economy, it is worth it if we are approaching an inflation point in the real estate market. Indications are that the Federal Reserve has finally realized that it will need front-loading rate hikes to curtail surging inflationary pressures that will cause the bond market to reset. Consequently, the 30-year mortgage rate recently surged past the 5 percent level (average mortgage rates are up 2 percent since December 2021).
While rising mortgage rates are leading to buyers’ ability to bid up home prices, it is still not clear whether an actual correction or sustained reduction in median sale prices is likely this year. On the demand front, many favorable structural drivers are still in play. First, millennials are first-time homebuyers looking for a sweet spot. According to a recent NAR report, “The combined share of younger millennial (23 to 31 years old) and older millennial buyers (32 to 41 years old) rose to 43% in 2021, up from 37% the year before.”
Second, the shift of some white-collar workers from the top-tier to second-tier cities has seen rapid growth in urban and suburban areas experiencing increased fresh and ongoing demand. As Fortune magazine’s Shawn Tully notes: “The home-office economy has left unshackled families with high-cost metros to coax and flock to super-affordable Sunbelt cities, boosting their markets.”
A third factor has to do with price-to-rent ratios. While sharply surging in price-to-rent ratios, fast-growing metros (Boise, Phoenix, Austin, etc.) may be a cause for concern, as stunting increases in rents across the nation may increase in recent months as potential homebuyers for a push factor. .
Essentially, there is a fixed and predictable monthly mortgage payment with homeowners who may be looking for some strength to keep pace with expectations. The fact that the real estate may act as an inflation hedge is an additional bonus.
Finally, the emergence of deep-pocketed corporate buyers and investors has been a factor in sustaining demand, especially in Sunbelt cities. Private investors are competing and often outbidding first-time home buyers.
On the supply front, housing inventories continue to remain low. The fact that new housing construction (especially of single-family homes) was muted for a decade after the 2007-08 crash left the US with a major supply shortfall. High-cost materials and supply bottlenecks have further hampered home builders ratcheting up new construction and delayed arrival of new units into the market.
Furthermore, many existing homeowners are unwilling or unable to put their homes on the market. Many have locked in historically low mortgage rates in recent years as they are unwilling to take on the risk of a red-hot housing market where they may not be able to afford a high-priced home. rate. Insufficient new and existing home inventory will likely keep prices high in the near term.
While a housing market correction in 2022 is unlikely, there are many serious headwinds facing the real estate sector. Increasing housing affordability poses associated with increasing problems. In many parts of the country, particularly in the metro regions, both rent and home prices have increased to a fraction of the monthly budgets that households devote to shelter-related costs. (Typically, around 30 percent of monthly income is rent or mortgage [and HOA] payments are considered ideal.)
At present, the very tight labor markets and the strong household balance sheets offer sufficient ballast to sustain real estate demand at elevated home prices. As the Federal Reserve turns to hawkish and implements aggressive rate hikes to fight inflation, there is a definite risk of an economic hard landing in 2023. difficulties meeting their housing-related expenses.
A recent study by The Dallas Fed the following stark warning: “Our evidence points to abnormal US housing market behavior since the first time in the boom of the early 2000s. The price-to-rent ratio, the price-to-income ratio, and the price-to-income ratio of the 2021 house prices appear to be out of step with fundamentals. ”
The one mitigating factor is that the financial sector has not lowered borrowing standards this time around, and that the reduction in the risk of broader shock to the real economy when the housing market eventually cools.
Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.