If you think the white-hot housing market is a supernova that’s destined to burn out, here’s some advice: Put on your heat-deflecting space suit.
The factors that led to the housing boom and sellers market are still very much with us: pent-up demand; limited supply; excess cash in the economy as a result of pandemic-induced savings; low interest rates; rising inflation; steadily climbing builder prices; and a demographic bulge of millennials who want to start families and need more room.
To satisfy demand, the U.S. housing market needs 3.8 million more homes than are currently on the market. That’s 50% higher than three years ago. There’s no way construction can catch up with demand anytime soon.
Not a bubble, exactly
I’ve been a chief financial officer for years — including during the challenging years of 2008 and 2009 when the real estate market collapsed. Now as CFO at financial-services company Ygrene, I’m paying particularly close attention to the unique forces at play.
While you could call this real estate boom a bubble, it’s unlike the speculative froth we saw before the Great Recession. The catalyst for this recent buying frenzy is the Covid-19 forced shutdown of the economy and a subsequent acceleration of underlying market trends.
Price increases will likely slow toward the end of the year. Freddie Mac predicts home prices will rise overall by 6.6% this year and slow to 4.4% in 2022. Nonetheless, conversations we will be having about real estate next summer, and the summer after that, will be just like the heated conversations we’re having now.
The continuing real estate boom will be good for the economy. Plenty of jobs will need to be filled, not only to build new homes, but for renovations, repairs and additions to existing houses. More home-related products will be sold. Home Depot and Lowe’s will be very busy — and will need to hire more employees. There’s a good chance REIT investors will be happy.
Secondary markets will thrive. A wider acceptance of virtual workforces means home buyers who can’t afford San Francisco will look at Sacramento. Instead of Brooklyn, young couples will be attracted by much lower home prices in Buffalo or Syracuse.
Rural markets will benefit. Buyers will not only get more property for less money, but improved Wi-Fi service and new infrastructure projects will make formerly ignored parts of the country even more attractive. The roaring real estate market will lead to a geographic redistribution of wealth.
And we’ll see a more sustained focus on home value. Many homeowners will decide it makes the most financial sense to stay put and upgrade for increased value. There are more ways than ever to finance home improvements, beyond the traditional options such as HELOCs, personal loans and credit cards. One affordable alternative is the property assessed clean energy program, or PACE, which allows homeowners to finance energy-efficient and resiliency upgrades up front, then pay the costs back over time.
The evolution of housing
Empty nester baby boomers who don’t want to sell their homes will put in new solar panels, bathrooms, kitchens and patios to improve the value of their homes. Adventurous younger people will buy homes in city neighborhoods that have seen better days and fix them up. I believe we’ll see more gentrification and a rise in urban home values.
The rental market will continue to surge and evolve. Rents for apartments in desirable big cities like New York, San Francisco and Chicago, which declined during the pandemic, are steadily recovering. And in the suburbs, there will be more built-to-rent communities like Las Casa at Windrose, a gated subdivision of single-family homes outside Phoenix, that developers are building to rent, not sell.
A sustained tight housing market, will, unfortunately, also mean more people earning lower wages will be shut out of the home ownership market, perhaps permanently. Service workers, civil servants and even teachers and nurses who can’t take advantage of virtual workplaces and have to live in or close to expensive cities simply won’t be able to afford to buy, even if interest rates stay low. There will be less affordable housing, and that’s not good.
To be sure, a prolonged housing boom isn’t guaranteed. An unexpected geopolitical event, a resurgence of the pandemic, a severe recessions, a 9/11-type “black swan” incident or the bursting of an overheated asset bubble could make life very different.
But in all likelihood, buyers and sellers are going to spend at least the next several years — if not many more — grappling with difficult decisions: When should they pull the trigger and buy or sell? How far should buyers stretch their budgets? Where should sellers go after the sale? How much should current and new home owners spend on improvements to increase value?
The good news is that if Americans will indeed be consumed by making these kinds of spending evaluations in the coming years, the economy is bound to benefit.
Greg Saunders is chief financial officer of Ygrene, a financial-services business focused on financing energy-efficient homes.