The housing market is on fire
There is a housing shortage amid rising demand, leading to bidding wars
Housing costs are rising throughout the country. The average rent in the U.S. has risen 14 percent over the past year, according to Redfin data cited by the Washington Post, and the average rent in some cities has risen much more—such as 40% in Austin and 35% in New York City. And the median sales price of a house in the U.S. has risen 14 percent over the last year to $408,100 in the fourth quarter of 2021, according to government data.
As you can see in the chart below, housing prices were about flat for a few years until the Federal Reserve started its extraordinary stimulus measures in response to the COVID-19 pandemic.
The Federal Reserve now holds $2.7 trillion in mortgage-backed securities, double the amount it had before the pandemic. The Fed also lowered the federal funds rate to near zero in the wake of the pandemic. The low federal funds rate and the Fed’s active purchases of mortgage-backed securities have kept mortgage rates lower, boosting demand for housing. As a result, there are bidding wars for houses in many parts of the country.
In addition to the Federal Reserve’s policies, there are a number of other reasons why it’s hard to buy a house now. For one thing, the pandemic has increased demand for housing; the shift to remote work has led more people to want a larger space to live in. In addition, millennials, a historically large generation, have now reached an age where it’s time for them to buy their first house.
But there just aren’t enough houses for everyone who wants one. Since the 2008 economic crash, the U.S. hasn’t been building enough housing, so the country is now short millions of homes. And many Baby Boomers are holding onto their homes rather than selling.
The available housing inventory in the U.S. has continued to reach record lows, as you can see in this chart featured by MarketWatch:
Part of this is due to the rising cost of building homes. Land, construction worker wages, and lumber have all gotten more expensive. Construction costs are up 21% over the past year, according to Robert Dietz, chief economist for the National Association of Home Builders, who was cited by Bloomberg.
Many existing homeowners also don’t want to part ways with their houses. The current shortage of available housing has made it difficult for existing homeowners to find new housing that meet their needs, so they’re holding onto their current homes, further exacerbating the housing shortage.
As more people are priced out of the housing market, there are more people renting, which has raised rents. High housing costs are also preventing people from moving to where they might have more economic opportunity.
The bottom line is that we need more housing. We should try to make it easier to build housing, by relaxing zoning laws so that more multi-family complexes can be built and zoning more land for residential construction. And we need to make it more attractive to build in the physical world, not just online. A lot of money and attention has been flowing into the virtual world, and more of that needs to be channeled into the real economy. Facebook may be betting on the metaverse, but you can’t live in the metaverse. We all need a place to live, and building homes is one of the most important economic activities in the real world.
We also need to fundamentally rethink the way the middle class builds wealth. Right now, a middle-class homeowner has most of their wealth tied up in their house and expects their home value to keep going up. But if housing prices just keep going up, that’s going to lock out new generations from buying homes. That has already happened in expensive housing markets like the San Francisco Bay Area and New York City. We should aim to have housing be affordable enough for most people to be able to buy, not for housing prices to keep going up to benefit only existing homeowners.
You may be wondering: Is this a good time to buy a house? Maybe. Mortgage rates are low, so you’ll be able to lock in a lower monthly payment now. The Federal Reserve is winding down its purchases of mortgage-backed securities and eventually planning to sell some of them, which will raise mortgage rates. Because of supply problems, the cost of building new homes will continue to rise. Due to climate change, land safe from floods and fires is becoming scarcer and more expensive. Finally, if inflation persists, owning a house is a good hedge against inflation, since your home value will go up at least with inflation.
On the other hand, if the Federal Reserve overreacts to inflation by raising interest rates too much, then that may result in a recession, leading housing prices to fall. But in the long run, housing prices are probably going to keep going up, so you might as well buy before they get even higher.