One of the most striking trends to emerge out of the crisis is the new housing boom in developed countries. The price of residential real estate has been rising steadily during the crisis, but especially during the subsequent recovery.
This is the product of an imbalance in the real estate market that is very visible in the case of the US, where demand is far outstripping supply, generating a housing shortage that will only be solved in the short term if the demand dynamic softens, since supply (housing construction) is lagging behind and cannot rebound overnight.
For now, Americans will have to 'fight' to buy the few homes that are available, paying an increasingly higher price and seriously jeopardizing the American dream.
The housing market is driven by a number of factors that could continue to put upward pressure on prices, although it should also be stressed that there is an opposing force that could become a major risk in the short and medium term: the Federal Reserve and the interest rate hikes to come.
The Real Estate Boom in Figures
On the one hand, households have seen their disposable income rise during the Covid-19 while interest rates fell.
Also, many Americans have sought a change of house in view of the new preferences that have emerged during the pandemic (more space, light, terrace, patio...). On top of that, the crisis brought housing construction to a standstill, which has kept supply limited.
The price index has risen by 27%, if compared to before the turn of the decade. Where in 2020, a home cost $331,800, today it costs $377,700. Plus, pre-owned homes have also taken a big hit as they are currently at $358,000, when only about two years ago that same home could cost a maximum of $270,700 - demonstrating the incredible and unstoppable inflation.
In fact, the steep uprising of the market is even being compared to the current exchange and crypto trading market, as well as the Bybit trading bot software and its automatic trading.
A Red-Hot Market
"Since Americans came out of spring 2020 confinement, the housing market has been red hot. We believe this boom still has plenty of room to run, particularly when it comes to the homebuilding sector. We believe the main support for this activity is extremely low housing inventories. After a decade of underinvestment in construction, vacant housing (unsold owner-occupied homes) is at extremely low levels," say JP Morgan analysts in a report dedicated to real estate and construction.
Barring a drastic rise in interest rates that makes mortgages much more expensive, the U.S. economy has all the ingredients right now for housing demand to hold up and continue to outstrip supply.
On the one hand, job creation is strong, wages are rising, and American confidence is high. On the other, returns on conservative financial assets remain low, so many Americans are opting to invest in housing, whose appreciation and periodic return in the form of rent exceeds that of much of the asset class.
Housing Supply
Beyond demand, which could cool with interest rate hikes to come, the US also has a clear supply problem. There are not enough homes for that much demand.
The housing market will need more units, not only to replenish a dwindling 'inventory' (unsold homes), but also to meet the demand created by the ongoing formation of new households.
However, just that is also the flip side of this housing shortage. The young, small, or middle-class buyer who cannot access a property because prices are already out of their reach or because they do not even have the possibility to access the negotiation before the house is sold (houses for sale fly).
Such is the rush to buy a home that many buyers are unable to even get to negotiate or see it in person even if they have enough capital to pay a down payment or buy the house.
By the end of last year, the number of homes in an affordable price range for families with incomes between $75,000 and $100,000 had fallen by nearly half a million from pre-pandemic levels. This is what the National Association of Realtors (NAR) calls the "dual problem" facing buyers: rising prices and too few homes for sale.
Unlike traditional indicators of housing affordability (price relative to rent or price relative to rent), this report also takes into account the inventory of homes for sale at different price points.
The study reveals that housing affordability has worsened over the past two years for all but the wealthiest Americans.
On the other hand, according to OECD data, it can be seen how the price of housing in relation to the income of Americans is already close to the maximums of the last decades (it is at the maximums of 2007), while the price in relation to rents is at record levels, which in normal circumstances would mean that housing has excessively high valuations.
Now, experts believe that the market could begin to stabilize gradually as interest rates rise and the supply of new housing starts to gain traction, allowing for a soft landing of the market.
JP Morgan believes that "even if demand for new units were to remain near trend, at the current pace of new home construction plus mobile home shipments it could take up to three more years for inventories to rebuild and restore balance to a red-hot housing market.
However, we expect housing starts to begin trending upward over the course of 2022, so the market could balance in less than three years. Even so, we believe the housing boom still has room to run."
