Last month, I called the US housing market a “giant flaming marshmallow.”
Pandemic dynamics (e.g., the proliferation of work-from-home arrangements and the desire to keep a safe distance from other people who might be infected) combined with record-low mortgage rates (themselves a product of the pandemic, via Fed policy), have almost surely created a bubble in US housing.
However, I’ve derided the imprecision of the term “bubble” and variously chided folks for the reckless abandon with which the term is applied. So, I was compelled to come up with a more “scientific” way to describe an overheating housing market.
I landed on “giant flaming marshmallow.” Originally, I applied it to housing starts.
Fast forward a month, and residential starts posted their first decline since August, falling 6% in January after a revised 8.2% rise in the previous month.
Is the marshmallow cooling? Well, maybe. After all, the dynamics described above served to drive prices into the stratosphere during 2020, and affordability serves as a natural check on demand.
Rock-bottom mortgage rates ameliorate that, but only to a point. You still need a down payment.
On Wednesday, NAHB spoke of “skyrocketing” prices for lumber. “Lumber prices have been steadily rising this year and hit a record high in mid-February, adding thousands of dollars to the cost of a new home and causing some builders to abruptly halt projects at a time when inventories are already at all-time lows,” NAHB Chairman Chuck Fowke remarked, in color accompanying this month’s read on builder confidence.
The group’s chief economist described demand as “solid” citing, among other things, “low mortgage rates and the suburban shift to lower cost markets,” but added that “some cooling in growth rates for residential construction” is likely this year thanks in part to rising costs. Builder expectations are still elevated, but did fall to a six-month low.
You can take all of this for what it’s worth, but I would venture that we may have seen the top.
Of course, that doesn’t mean some kind of “crash” is in the offing. After all, pandemic dynamics won’t simply fade away overnight. Folks aren’t likely to flood back into dense urban centers even if the vaccines do manage to subdue COVID and its many mutations.
At the same time, low borrowing costs should continue to attract buyers. I’d also just toss this out there: If powerful Democratic lawmakers can convince Joe Biden to go along with massive student debt relief, that too could catalyze a surge in home-buying assuming household formation (both in a figurative and literal sense) is being delayed by the overhang of debt incurred for college.