07/19/2021
The following is a brief attempt at identifying some of the key factors responsible for the current condition of the housing market. The two questions I attempt to answer are:
1.) Why is the current housing market so hot?
2.) How long can it stay this way?
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If you’ve been in the real estate market over the last 18 months, you’ve probably realized what an extraordinary time it is to be a seller. Every day we see news about nationwide bidding wars as people offer tens, sometimes even hundreds of thousands of dollars over asking price without even walking inside. Locally, we’ve seen housing prices rise almost 20% since July of 2020. But why?
The housing market from a microeconomic perspective is incredibly nuanced; from a macroeconomic perceptive however, the answer may be less complicated. Home prices, like other commodities, are directly influenced by supply and demand. When there is an excess of supply with low demand, the market is considered soft, or “cold”. Inversely, when there is a shortage of supply accompanied by high demand, the market is considered hard, or “hot”. So, we know we’re in a very hot seller’s market, but why is that so? What are the underlying factors responsible for high demand with historically low supply?
1.) Interest rates.
2.) Covid.
Demand is defined as a consumer's desire and willingness to buy a specific product for a specific price. Today’s Interest rate environment is one of the lowest in history; this effectively means that more buyers are willing and able to afford financing a home than ever before. But what about Covid?
This time last year, the uncertainty of Covid caused consumers to hunker down in their homes for months on end as the one safe place to be amidst the pandemic, inadvertently creating an incredible housing shortage. Although we may be coming out of the pandemic, the housing shortage is still here. The problem consumers now face is: with inventory so low, where am I supposed to go if I sell? What's the point of selling at the top of the market if I must turn around and buy right back in?
Now that we’ve defined the first half of our two-part question, lets focus in on what everyone wants to know: how long can this last?
The short answer is I don’t know, but I am willing to speculate. The data shows that pending home sales are starting to take a U-turn from current all-time highs; this suggests to me that the housing market may be starting to cool off slightly.
When it comes to interest rates, the Federal Reserve has been adamant in suggesting they have no intention of raising interest rates until 2023. Only time will tell whether the Federal Reserve keeps their word on interest rates or not, but when taking their stance at face value, it’s reasonable to assume that the housing market has the potential to remain in its current state for another 18-24 months depending on the amount of homes that hit the market between now and the end of the year.
