There is no doubt that the post-pandemic rebound has been stronger and far quicker than expected. The befuddled Fed and the booming stock markets signify a new normal as inflationary pressures define the reality of an economic turnaround. However, while inflation seems transitionary in nature, the spiraling demand is breaking records across a vast array of markets. None of the markets, however, compare to the underdogs of trade: the Real Estate Market.
The surge in the housing market is phenomenal, to say the least. Nationwide, the housing prices have spilled into double figures relative to yesteryear. The peak demand appears more stellar when compared to the aftermath of the Financial Crisis of 2008. While the pandemic is a completely different shock in contrast, today, the median home price in the United States is closing in on $350,000; double the level a decade ago. While such an exponential rush of price is often problematic, the reality is much safer than a distress signal. And while it is true that the housing costs are rising more rapidly than the mean earnings in the economy, the housing market is certainly not in a bubble.
The house prices have paced significantly since the pandemic struck last year; gaining weight due to higher savings being poured into a market with a relatively fixed supply and a secure store of value in a period of uncertainty. As the Fed embarked on a generous spree of pumping stimulus worth $120 billion via the extensive open market purchase of Mortgage-backed securities, the fixed mortgage rates plummeted to a record low level. Coupled with a floor threshold drop in the interest rates and the excess savings garnered through hefty unemployment benefits and rent support, the mortgage rates plunged well below the targeted 3%. Such attractive mortgage rates along with forbearance on mortgage and student loan payments (courtesy of the pandemic) helped the colossal demand to gain traction.
However, while the demand picked up, the housing supply perished as construction faced impediments in the form of intermittent lockdowns, price shocks in the lumber market, and a sticky recovery in the labor market. Moreover, the bottleneck of the housing supply was further narrowed as the mean houses on sale dropped since last year, primarily due to the foreclosure Moratorium on the mortgage payments driven to avoid a panic in the housing market during the pandemic. It is safe to admit that the economy and the elements thereof performed beyond the expectations of even the most sage economists of our time.
The housing demand was further edged by the less-than-subtle shift of employment to a completely virtual setup. Such an extended period of leisure and convenience of connectivity allowed the urban population to relocate to suburbs and smaller cities. According to the reports, the apartment dwellers of megacities apparently paid more than the listed price to gain ownership (a smaller sum compared to the sky-high prices in the metropolis). Such poor bargains added fuel to the already incendiary market as about three-forth of the houses were sold an estimated 10-15% above the historical list prices.
While the demand surge is astonishing, the mechanics driving the price hike are quite simple to comprehend. And therefore, the housing market could hardly be compared to the infamous housing bubble that led to the financial crisis a decade ago. For starters, a price bubble inflates when the sole intention of the surging demand is driven by an incentive to sell the property to make a profit off a bullish market. In reality today, the houses are being purchased under relatively tighter mortgage underwriting protocols. Reports show that majority of houses being flipped today are by investors making a profit on renovation rather than a surging market. Moreover, while the market is surely overvalued, a housing crash is not imminent since the job market is on a rebound as unemployment rates have noticeably dwindled over the past few months. Coupled with a stronger economic recovery, mortgage defaults hardly seem on the cards. However, a price correction is quite imminent.
As the Federal Reserve has insinuated inflation as a worrisome byproduct of a pacy economic boom, the Fed could be expected to cut the Asset purchases in the following months. Coupled with normalization in the interest rates, the mortgage rates would eventually rise while adjusting the house prices along with the housing demand. However, the expected activity and measures won’t take effect in a fortnight and would certainly not cool off such an overheated economy without any impact being felt throughout.
The housing market remains extremely supply deficient: a major obstruction in the line of recovery. Freddie Mac, a Federal Mortgage Corporation, estimated a need for almost 3.8 million new homes to meet the surging demand by the culmination of the last fiscal year. However, the recently passed bipartisan Infrastructure bill completely eliminated the $326 billion portion of Biden’s original plan to provide affordable housing across the United States. Thus, while a modest price correction is expected to blow off without any considerable damage to the broader economy, the markets are apparently out of sync with the traditional estimates gauged by the experts.
An emerging threat is the spread of the Delta variant of the Coronavirus. If the mutated virus manages to render the vaccinations futile, the infections could ultimately push the United States into another bout of lockdowns. Leading alongside would be unemployment. This time, however, the wave would be accompanied by a legitimate housing bubble. The Fed would have no option but to stall the foreclosure again, pump more stimulus, and face another round of investor theatrics. And with no plan of a competing supply in the short run, the housing market could plausibly morph into a nightmare quite familiar to the financial world.
