Cooling or Collapsing? Key Factors To Consider About the Housing Market

There’s a recurring question among the pundits and talking heads in the media recently: with mortgage forbearance winding down, housing inventory hitting a 40-year low, and lingering uncertainty over a seemingly never-ending pandemic, is the housing market set to significantly cool down?

Only time will tell. But in my opinion, it’s just getting warmed up.

While some point to China’s Evergrande debacle and our own crisis of 2008 and try to draw comparisons to our current market situation, the facts don’t support any such analogies. In both cases, the problem was massive oversupply. In China, fully 22% of residential property is unoccupied — yet despite this, Evergrande ran up billions of dollars in debt building apartment complexes that now sit empty. As for 2007 and 2008, it was speculation that drove real estate price up, despite a glaring oversupply of houses. (How bad was the problem? It actually prompted then-Fed Reserve Chair Alan Greenspan to say that  the “low cost option” would be for the federal government to “buy the homes and burn them.”)

Neither case describes where we are now. In fact, the issue currently facing American homebuyers is a critical shortage of available properties.

A recent report from the National Association of Realtors estimates that the country is facing a supply deficit of 6.8 million housing units, primarily single family homes. This, despite a consistent demand for roughly 1.6 million such homes each year.

There are several reasons for the shortage — one being that construction of affordable new housing slowed significantly over the last 20 years. Another reason is that the college graduates who were forced to their parent’s basements after the bubble of ’07 to ’09 saved their money and bought homes in droves once household formation resumed at a normal rate.

Further complicating the issue is the fact that the pandemic has changed how people feel about housing. Between working from home and seeking a sense of security in a world that seems more unpredictable every day, people have re-prioritized home ownership.

In 1981, trend forecaster and marketing consultant Faith Popcorn coined the term “cocooning” — which, in a case of “what’s old is new again,” perfectly sums up where we are now. Our homes have become a place for work, play, and refuge. Homeowners seek insulation from the outside world and control over their environment. As a result, they’re spending money on making them just right; sales at both home improvement and home furnishing retailers have surged in recent months.

But once again, the issue is supply.

Shortages are everywhere — a situation which could lead to problems. Shortages lead to inflation as too many dollars chase too few goods. Inflation then causes central banks around the world to tighten credit. This shortage of housing finance has forced many credit-worthy borrowers who would otherwise be buying homes into rental situations. We’ve already seen the availability of credit being constricted due to the delays in recapitalizing Fannie Mae and Freddie Mac.

Big real estate investors, asset management firms, and increased interest rates are other factors that drive up home prices and make home ownership less accessible to average Americans during a shortage. “Stagflation” is a term first used in the ‘70s to describe an economy that was experiencing consistently high inflation with consistently low economic output. At the time, the oil crisis was to blame. But since then, it’s become more common to see rising prices during periods of slow or negative growth.

That doesn’t have to be the case this time. But it’s going to take some action on the part of the Biden administration. By finishing the recapitalization of Fannie and Freddie and the release of their conservatorship, the government could generate over $100 billion that could assist communities and first-time homebuyers.

Either way, as the Federal Reserve System tapers later this year economic activity needs to accelerate – particularly the housing market. A strong housing market has a multiplier effect on many things throughout the economy. Everything from paint to appliance sales benefit.

Again, only time will tell.


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