Home prices are through the roof, mortgage rates are rising alongside US yields and the Fed is seemingly on the verge of adopting an approach to balance sheet reduction that entails letting MBS run off faster than Treasurys.
Your guess is as good as anyone’s when it comes to assessing what that combination might mean for a distorted housing market.
I don’t have any answers, but I have a lot of questions. The market has been absurdly tight in the pandemic era, as a combination of policy largesse, work-from-home arrangements, a flight to the suburbs and shortages of materials and labor contributed to an acute supply-demand imbalance.
The situation is improving at the margins, but my argument continues to be that prices are unsustainably high. At the least, prices can’t keep appreciating at the current rate, otherwise, virtually everyone who isn’t an investor will be priced out of the market.
As a reminder, investors bought a record 18% of US homes purchased during the third quarter, according to Redfin data (figure below).
Discussing those numbers in November, Redfin Senior Economist Sheharyar Bokhari was unequivocal. “Increasing home prices fueled by an intense housing shortage have created opportunities for investors to reap big profits,” Bokhari said. “Those same factors have pushed more Americans to rent, which also creates opportunities for investors because investors typically turn the homes they purchase into rentals.”
Speaking of renters, America is turning into a nation of them. On Thursday, Bloomberg ran a piece citing data from RealPage, which showed almost 98% of professionally-managed apartment units were “spoken for” last month (figure below).
That’s not just a record, it’s “crazy,” according to Jay Parsons, RealPage’s deputy chief economist.
The linked Bloomberg piece does a nice job of summarizing all the relevant dynamics, but the main takeaway is just that the sheer number of crosscurrents makes it impossible to spin a coherent narrative. For example, Kriston Capps wrote that,
Rents are rising, and the discounts and concessions of 2020 are likely a thing of the past. Moreover, demand for housing continues to outpace the supply. In this specific moment, with Omicron surging and rental chaos a recent memory, many landlords will stick with their current tenants. The housing shortage is so severe that property owners likely don’t need to charge max rents to make a bundle. Families that do need to move right now face tough choices — or rather, fewer choices.
The convoluted situation described by Capps is likely to get more murky still as the Fed dials back stimulus.
Mortgage rates jumped 11bps last week to 3.22%. That’s up nearly 60bps from the record lows hit this time last year (figure below).
Plainly, rates are still very low by historical standards, but rising rates and record-high prices are a double-whammy for would-be buyers, especially in a market increasingly dominated by deep-pocketed investors who generally pay cash.
With prices still perched at nosebleed levels (the median new home price was $417,000 in November, while the figure for existing homes was $353,900), higher borrowing costs will add to an increasingly onerous downpayment burden.
That combination could (finally) erode demand. As Bankrate’s chief financial analyst told Bloomberg this week, 4% would seem daunting compared to the rates buyers enjoyed in the wake of the pandemic.
Ultimately, we could look up a year from now and discover that at least one old adage still holds: The cure for high prices is high prices.
My guess is that sales volume shifts more toward institutional rental fleets, whose demand is less sensitive to mortgage rates. With more would-be homebuyers forced to rent, rents keep going up (part of why institutional demand less sensitive . . . ). Suggests may see price trajectory separate by type of house, with the houses not suitable for rental fleets (too old, too expensive, too much rent control) seeing more price decline than the houses sought after by the rental fleets.
With no end in sight for the peaking and reversal of climate change… the number of houses which will either burn up in forest fires, get swept away in floods, be ripped from their basements in tornadoes and abandoned for lack of water in drought stricken areas or from rising sea water will rise every year. I rather expect to start seeing more underground concrete reinforced homes.