Housing: Boom or Bust?

As we enter this “post-COVID” world, there have been some interesting economic and market developments; none more interesting to me than the current housing market. It would be an understatement to say it is a seller’s market right now. I recently read an article that stated the average home price in New Jersey was up 24% year-over-year at the end of the first quarter (link: NJ Home Prices). You read that correct, New Jersey housing, quite possibly the very house you sit in right now as you read this, has risen 24% in just one year. It’s not just New Jersey, either. The hottest real estate markets in the country right now include Springfield, OH, Billing, MT, Austin, TX, & Reno, NV. 
Numerous factors are contributing to this hot housing market, some of which are easily identifiable, while others are less discussed. Let’s start with the obvious: 


The laws of supply and demand tell us that a decrease in supply will result in higher prices for a given good, with all else being equal. According to the Federal Reserve Bank of St. Louis, the current read on US Months Supply of New Single Family Houses is currently 3.6 (link: Supply of Houses). The months’ supply indicates how long the current for-sale inventory would last given the current sales rate if no additional new houses were built. The all-time low reading for this economic metric is 3.5… and that figure was reported in October of 2020. What is even more interesting to me is usually, economic recessions coincide with increase home inventory. This past recession is the exception, with just the opposite happening. 

Low Mortgage Rates 

We call this one “Gasoline on the Fire” in the office. If people are able to borrow money cheaply (i.e through a mortgage), people are able to afford more house through lower monthly payments. While interest rates have spiked recently, we like to keep perspective on things. Below is a chart of 30 Year Mortgage Rates dating back to the 1970s: 

3% for a 30-year mortgage is historically low, and buyers are rushing to take advantage of it, creating higher than average demand. 

The Pandemic 

The COVID pandemic was a disrupter, not only to our everyday lives but to many facets of business. Due to the pandemic, US Housing Starts saw a sharp decline in mid-2020. Simply put, builders were not building homes on a normal schedule due to shutdowns. Those shutdowns have since been lifted and construction has resumed, but there needs to be a “catch-up” due to the lost period of construction. All of this results in more of a shortage. 

A similar situation occurred in the materials industry—the most popular story being in lumber. Lumber production dropped in mid-2020 and has not caught up to demand yet. On top of that, there has been elevated demand for lumber due to stay-at-home projects and renovations. Higher lumber costs equals higher home prices. 

The Less Obvious  

There are two less obvious trends taking hold in the housing market. First is a rush to suburbs from the cities that has been taking place for over a year now. This trend really heated up with the onset of the pandemic. Second, there is a possible generational tailwind increasing demand. The millennial generation is starting to enter their higher-earning years, meaning they are looking for houses to settle down in. The millennial generation is the largest in the United States, with there being over 72 million “Millenials” in the United States. Their continued desire to settle down, start families, and de-urbanize could lead to continued demand tailwinds. 

The Results 

The result to these factors is quite simple: record low supply and higher home prices. But as those who are currently in the housing market know, it is not just higher housing prices. In California and Colorado, 60 percent of homes sold in March fetched more than their asking price. Buyers are waving home inspections and including all sorts of creative stipulations to their offers in hopes of their offer being the lucky one to get accepted. People are even buying homes without ever stepping a foot in them. 

So the question that comes to everyone’s mind, of course, is: are we experiencing another housing bubble in the United States? After such drastic price increases, and with all these factors creating the perfect storm for housing price increases, it is hard to say we are not. But, at the same time, there are so many buyers still out there on the sidelines, waiting for homes, that any drop in price would be bought up immediately. Obviously, double-digit housing price increases are not sustainable, as we learned in the early 2000s. That said, just because housing prices increased so rapidly does not mean they need to correct or crash in the future. The rate of price increases could simply slow when supply begins to catch up or if mortgage rates begin to creep up. One thing is for sure, we are all extremely interested to see how the housing market plays out in the remainder of 2021 and beyond. 

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