jAlmost everyone agrees that the reason home prices have soared 34% in the last two years is that there is a lot of demand for housing, but not enough supply.
But the US may be at a turning point, with many properties hitting the market just as demand slows, analysts say. That means prices could level off and, depending on demographics, even start to decline.
Without a doubt, prices continue to rise. The median sales price of existing homes hit an all-time high in April of $391,200, up 14.8% from a year ago, according to data released May 19 by the National Association of Realtors (NAR).
Read more: Why Phoenix, of all places, has the fastest growing home prices in the US
But other signs indicate the breakneck pace of rising housing demand may be slowing, after the cost of a monthly mortgage payment for a median-priced home jumped 27% from a year ago after the Federal Reserve raised interest rates in March and May. . Existing home sales fell for the third consecutive month in April, falling 2.4%, according to the NAR. Real estate brokerage Redfin says that in April, only 60.7% of home offers written by its agents were met by competing offers, compared to 63.4% the previous month and 67.4% of a year ago. A survey by the National Association of Home Builders showed builder confidence in the market for newly built single-family homes fell to the lowest reading since June 2020. And the Census Bureau said on May 17 that the number of Permits Issued for New Single-Family Homes Single-family homes fell 4.6% in April from the prior month.
The slowdown in demand comes as the US housing market is finally seeing a surge in new-build properties, after more than a decade of caution by homebuilders marked by the Great Recession. The Biden administration predicts that there will be more units completed this year than in any year since 2006. There were a record number of single-family units under construction in April, 815,000, the most since November 2006. There are currently 826,000 multi-family units. units under construction, the highest level since 1974, according to the Census Bureau.
“There are a huge number of housing units under construction,” says Bill McBride, author of the blog. Calculated risk, who in 2005 correctly predicted the housing bubble and has since become one of the most reputable sources for housing market analysis. McBride says home price growth will slow and could stall later in the year, as demand wanes and more supply hits the market. There are currently about two months of supply of homes on the market in the US, which means it would take two months for all homes to be available for sale given current conditions, but McBride predicts prices will stagnate. if that amount reaches the value of six months. .
Some of these completions have been delayed by supply chain issues that are currently being resolved. Additionally, more housing units are being built as progressive cities and states relax building restrictions to address the affordability crisis.
California, for example, essentially banned single-family zoning and made it easier for cities to add multi-family housing. Although these measures went into effect in November, they could slowly start to appear in some neighborhoods as existing homeowners build accessory dwelling units (ADUs) on their yards to increase supply. Oregon essentially got rid of single-family zoning in 2019, and a similar law is moving forward in Maine. States and cities are also removing requirements that homes be built with parking spaces, also allowing for higher property density.
Are we in a housing bubble?
Like most analysts, McBride says we’re not in a bubble: lending standards are different, for one thing. He compares the current period to the early 1980s, when interest rates rose and home prices fell, when adjusted for inflation. The most likely scenario today, he says, is the same: Home prices will stagnate in today’s dollars, but that means they will actually go down a bit when adjusted for inflation.
Higher interest rates aren’t the only reason demand is declining. McBride predicted in 2015 that the 2020s would see a huge surge in demand as a large cohort of Americans moves into the 30-39 age bracket, a prime age for home ownership. But census data indicates there are fewer people in that age group than previously estimated, possibly due to excess deaths attributable to both the opioid epidemic and the COVID-19 pandemic. “The demographics are strong,” McBride says, “but they’re not as good as we originally thought, and we don’t know how much worse they are.”
The fact that companies continue to allow their employees to work remotely will also affect regional supply and demand. A recently published study says that remote work accounts for half of the increase in house prices since the end of 2019, as people moved to areas where they wanted to live, but where there was limited supply. If companies begin to roll back policies that allow workers to work remotely, demand could decline in many housing markets.
Some analysts are more pessimistic about how much demographics will affect demand in the US, which in 2021 saw the slowest population growth rate since the country’s founding. Dennis McGill, director of research at Zelman & Associates, whose CEO Ivy Zelman correctly predicted that home prices would peak in 2005 is one of them. Zelman and McGill say that because the US is aging while the fertility rate declines and immigration plummets, the current housing market may already be oversized.
The US population trends are similar to what happened in Japan two decades ago, Zelman and McGill say. In Japan, the population began to decline in 2011 and last year, the country experienced its biggest drop on record. In the US, births have been below the rate required to maintain population levels without immigration since 2007. Immigration has slowed since 2016. Net international migration added just 247,000 people to the US population. The U.S. last year, less than a quarter of what it did in 2015. And the first baby boomers, born between 1946 and 1964, are about to turn 80, which means they will either start dying or selling their homes. and downsize, which adds inventory to the market.
American builders have treated these demographic changes differently from Japanese builders, McGill said in an interview. Even before Japan’s population stabilized and then began to decline, developers slowed the rate at which they were building homes. In Japan, new home construction fell from 14 million between 1990 and 2000 to 11 million between 2000 and 2010 and fell further to 9.1 million between 2010 and 2020. While Japanese builders factored in population decline when planning, McGill says American builders are ignoring that. “Everyone on the development side looks back and says, ‘Well, we’ve always had a million and a half housing starts a year, so we should go back to that,’ but completely ignore the fact that the demographics underpinning it is different,” he says. “They have convinced themselves that there is a huge supply shortage.”
Markets like New York, Los Angeles, Chicago, Pittsburgh, Detroit and Cleveland have seen below-average population growth in each of the past 11 years, he says, suggesting demand could decline further in those areas. .
Across the country, the pace of household formation has long slowed, a reflection of declining birthrates, an aging population and the older age at which people are marrying and having children. (Household formation measures both when people join and live in a household, and when people die or move out of a household.) While 13.7 million new households were formed between 1990 and 2000, that number dropped to 9.5 million between 2010 and 2020.
A drop in house prices
McGill says house prices could fall as early as 2023 because, he says, builders have been overbuilding based on US demographics. “Our research says there’s a significant negative coming,” he says.
Of course, changes in demand are a matter of public policy. The Federal Reserve raised interest rates, which slowed demand. And the US stopped receiving as many immigrants as of 2016, which also manipulated demand. This could change if Congress passes a change in immigration laws, but Zelman thinks that’s unlikely.
The percentage of Democrats (83%) and Republicans (38%) who agree that immigrants make the country stronger, according to the Pew Research Center, is at its largest partisan gap since at least 1944.
McGill says anyone who wants home values to go up instead of down should support immigration. “If you want your economy to grow, you need population growth. It’s that simple,” she said.
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