The New Normal in Housing: How the Next Three Years Will Look
I’ll never forget the moment when I realized that Covid was a big deal. I’d heard rumors and read news articles, but my optimism led me to believe that this new virus would blow over quickly. That is until I made a trip to the grocery store. I could not believe how bare the shelves were and, to be honest, I started to panic. I’ve been in the real estate industry since 2003 and during the great recession of 2008, I suffered many painful losses and failures. Was this going to be another situation like that?
Standing in panic in the grocery store, I would never have imagined that we were about to enter the greatest housing boom in modern history. The housing market has appreciated 29% (Phx) and 27% (SD) over the last year and, while the market is slowing some, we’re anticipating at least another 10% appreciation in the coming year. So what happened? And when will this roaring market slow back down to a reasonable pace? While predicting the future is tough work, I’m going to take a stab at what I think the new normal in housing will look like from now through 2024.
The Real Cause of the Housing Boom
Let’s begin with what happened. It’s common to hear in the news or in conversation that the housing boom was caused by large numbers of new homebuyers entering the market so they could live in comfortable houses while riding out the pandemic. However, the increase in demand due to Covid was actually negligible. The real issue was, and continues to be, a chronic shortage of homes.
A Housing Market Timeline
Homebuilders were decimated by the Great Recession in 2008 and all but stopped building homes for a decade. Since the recession itself was caused in part by an oversupply of vacant homes purchased by speculators who never occupied or even rented out the homes they purchased, this was not actually a problem. The empty homes were slowly absorbed by the market, causing a pricing rebound that got us back to where home prices would have been had the recession never happened. Additionally, during this 11-year period, the largest-ever generation of American Millennials aged their way into homeownership and slowly but surely soaked up the supply of homes on the market.
Given these conditions, 2020 was set to be a tipping point in the housing boom. Covid, therefore, was not the cause of the housing boom, but it did exacerbate an already bad situation. Our homes became the focal point of our daily lives during lockdown and, as a result, homeowners became less likely than ever to list their houses for sale. Once home builders finally caught on to this, they worked hard to scale up production, but global supply chains collapsed under the pressure, causing building materials to increase dramatically in both price and lag time. Housing labor has also become extremely hard to come by as the American workforce, fueled by trillions of dollars in stimulus money, has no shortage of high wage job opportunities to choose from. Hence, demand has remained at average levels, while supply is at 30% of what we would normally expect to see.
So where do we go from here? Economics 101 tells us that either supply must increase or demand must decrease in order for us to return to a more balanced market. Increasing prices have not tempered demand much, likely due to record high wage growth fueled by government stimulus. New supply of homes is on the way, but it’s coming very slowly. Consequently, we have a situation where demand will cool slowly while supply will increase slowly. These are both good and normal economic forces. The heat of the housing market has indeed peaked and is returning to normal…slowly.
Given these factors, it’s likely that we’re in for a slow deceleration of the current seller’s market, which will return to balance around the end of 2023. Between now and then, I expect another 25% appreciation in housing prices–that would be roughly half the appreciation pace we’ve seen in the past twelve months. And yes, that means that by the end of 2023, houses will be much, much more expensive than they were two years ago.
So Is It a Good Time to Buy a Home?
Many economists believe that we’re due for a season of high inflation, which is now at 5.4% and will likely continue to increase. If you’ve had the unfortunate displeasure of remodeling your home recently (as I have), then you’ve probably noticed the tremendous increase in prices of not only building materials but just about everything!
Owning a home partially protects a homeowner from inflation since the price of the home, and usually the interest rate, are locked in. Thankfully, banking regulations that resulted from the fallout of 2008 ensure that the vast majority of people buying homes can actually afford them.
Given these factors, I expect housing to remain as one of the safer investments to choose from in the coming three years, and this is proven by current levels of investor buying. Over the past three to four months, the percentage of single-family homes purchased to rent to a third party has increased from around 14% to around 18% in Maricopa County. Anecdotally, the Gluch Group was just contracted by a fund that’s purchasing 6,000 homes a year for use as rental properties. While we have seen much higher percentages of investor buying in the past, particularly between 2009 and 2014, current levels are the highest they’ve been since 2014. This indicates that large, well-funded and well-researched institutional buyers are betting on housing at scale.
So, to answer the question, YES, it is a very good time to buy a home! However, you’d be wise to question the advice of a salesman like me who’s telling you that buying his product is a safe bet. That said, I’ll bet you a breakfast burrito I’m right!