Without question, home buyers are feeling the pinch right now. There is a significant shortage of both new construction and existing homes for sale on the market – and we are not yet even in the summer buying season. Given the pent-up demand from last year – it would not be too surprising to see an epic snapback in home buying activity this upcoming summer. Until the supply and demand of residential housing comes back into equilibrium, expect the market to remain red hot.
As the pandemic begins to recede, strength in the residential real estate market is broadening out to geographies all across the U.S. This fact is an extremely positive development for the US economy. This broadening out of the market was recently reported by CNBC in an interview with Sheryl Palmer, CEO of home construction company Taylor Morrison. In the article, Palmer stated that: “the strength in the housing market has broadened out in recent months, adding another layer to the pandemic-era residential real estate boom. We’re seeing strength across pretty much all geographies as well as all consumer groups.”
While the current market may be causing home buyers short term pain, the strength in housing is a long-term positive for the overall health of the US economy. As we witnessed in the aftermath of the 2008/2009 housing crisis, when the national residential housing market is struggling, the economy as a whole suffers. The health of the residential housing market is intimately tied to industries that span the entire U.S. economy. These can include skilled labor, construction, building materials, plumbing and electric, banking, insurance, retail – the list goes on. When activity in residential housing is down, revenue in all of these sectors falls.
However, the opposite is also true. When activity in residential housing is robust, all of those sectors see a boost in economic activity. The all-encompassing and dire nature of the pandemic meant that it had the potential to cause serious longstanding financial damage to the global economy. It is a welcome positive sign to see that economic activity in housing is now increasing across all locales and demographics.
As we have spoken about in the past, new construction activity decreased significantly following the financial crisis of 2008/2009. However, in the decade following that crisis, millennials began entering the home buying market in larger numbers. As the effects of the pandemic played out, many homebuyers began looking for larger homes, with more space for home offices and home schooling. Therefore, the demand for housing has increased, while the supply of housing remains at historically-low levels. From the same article, CNBC quoted Zillow CEO Rich Barton, who had this to say on the red-hot market: “Inventory is historically low, but the real headline is that homes are selling on average, in December, in 17 days, which is 25 days fewer than they did the December before. Homes are flying off the shelves.”
Not only has the pandemic contributed to higher demand for new and existing homes, but it has also contributed to an increase in demand for homebuilding supplies. Prices for homebuilding supplies have spiked across the board – from lumber to labor and everything in between. From the article: “Palmer said the homebuilder is facing higher costs right now, a common theme across the industry due to rising land and lumber prices.”
So far, this increase in prices has not dampened the appetite for homes. The demand is just too high at the moment. However, that does not mean that prices can continue to rise without any adverse effect on sales. Like any other consumer good, prices can increase only to the point at which consumers are willing to buy. As homes become less affordable, some consumer segments may be forced to leave the market – thus tempering demand.
In addition, mortgage interest rates continue to remain near historically-low levels. Many experts – including members of the Federal Reserve Board – believe that interest rates are likely to rise at some point in time. No one can predict the timing or magnitude of any potential rate increase. However, if mortgage rates were to increase, that could negatively affect home affordability and home prices.
Once again, there is little doubt that the recent surge in home prices is creating a lot of headaches for home buyers and home renovators. However, this situation will most likely be a short-term phenomenon. Home builders and suppliers will increase capacity with time – and are currently working to do so. Eventually the overwhelming demand for housing will be met with more supply. In the meantime, this spike in demand will work to jumpstart economic activity across the country at every level of the home building and renovating supply chain.
This boost of housing activity has the potential to heal a great many of the economic wounds caused by the pandemic in 2020.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.