Just about everyone agrees that the reason home prices have shot up 34% in the last two years is that there is a lot of demand for housing, but not enough supply.
But the U.S. may be at a crucial juncture, at which a lot of properties are coming onto the market just as demand slows, analysts say. That means prices could level off—and, depending on demographics, even start to decline.
To be sure, prices are still rising. The median existing-home sales price reached an all-time high in April of $391,200, up 14.8% from a year ago, according to data released May 19 by the National Association of Realtors (NAR).
But other signs indicate that the breakneck pace of rising demand for homes may be slowing, after the cost of a monthly mortgage payment for a median-priced house jumped by 27% from a year ago after the Federal Reserve hiked interest rates in March and May. Existing home sales were down for the third straight month in April, falling 2.4%, according to the NAR. Real estate brokerage Redfin says that in April, just 60.7% of home offers written by its agents faced competing offers, compared to 63.4% a month earlier and 67.4% a year ago. A survey from the National Association of Homebuilders showed constructors’ confidence in the market for newly-built single-family homes fell to the lowest reading since June 2020. And the Census Bureau said on May 17 that the number of permits issued for new single-family homes fell 4.6% in April from the previous month.
The slowdown in demand comes as the U.S. housing market is finally seeing a surge of newly-built properties, after more than a decade of caution from homebuilders, scarred by the Great Recession. The Biden administration predicts that there will be more units completed this year than in any year since 2006. There were a record number of single-family units under construction in April—815,000—the most since November 2006. There are currently 826,000 multi-family units under construction, the highest level since 1974, according to the Census Bureau.
“There are an enormous number of housing units under construction,” says Bill McBride, the author of the blog Calculated Risk, who in 2005 correctly predicted the housing bubble and has since become one of the most reputable sources for housing market analysis. McBride says that housing price growth is going to slow and may flatten by the end of the year, as demand wanes and more supply comes onto the market. There is currently about two months of supply of houses on the market in the U.S., meaning it would take two months for all the homes available to sell, given current conditions, but McBride predicts that prices will stall if that amount reaches about six months worth.
Some of these completions have been delayed by supply-chain issues that are currently being resolved. In addition, more housing units are under construction as progressive cities and states relax restrictions on building to tackle the affordability crisis.
California, for instance, has essentially banned single-family zoning and made it easier for cities to add multifamily housing. Although these measures went into effect in November, they could start to slowly show up in some neighborhoods as existing homeowners build accessory dwelling units (ADUs) in their yards to increase supply. Oregon essentially got rid of single-family zoning in 2019,, and a similar law is moving forward in Maine. States and cities are also removing requirements that homes are built with parking spaces, which also allows for increased density of properties.
Are we in a housing bubble?
Like most analysts, McBride says we’re not in a bubble—lending standards are different, for one thing. He likens the current period to the early 1980s, when interest rates jumped and home prices declined, when adjusted for inflation. The most likely scenario today, he says, is the same—home prices will stagnate in today’s dollars, but that means they actually slip a little when adjusted for inflation.
Higher interest rates aren’t the only reason demand is tapering. McBride predicted in 2015 that the 2020s would see a big boost in demand as a large cohort of Americans moved into the 30 to 39 age group, a prime home-buying age. But Census data is indicating that there are fewer people in that age group than previously estimated, possibly because of excess deaths attributable to both the opioid epidemic and the COVID-19 pandemic. “The demographics are solid,” McBride says, “but they aren’t as good as we originally thought, and we don’t know how much worse they are.”
Whether companies keep allowing their employees to work remotely will also impact regional supply and demand. A recently-published study says that remote work accounts for half of the home price growth since late 2019, since people moved to areas where they wanted to live, but where there was limited supply. If companies start reversing policies allowing workers to work remotely, demand could slow in many housing markets.
Some analysts are more pessimistic about how much demographics will affect demand in the U.S., which in 2021 saw the slowest rate of population growth since the country’s founding. Dennis McGill, director of research at Zelman & Associates, whose CEO Ivy Zelman correctly predicted that housing prices would peak in 2005 is one of them. Zelman and McGill say that because the U.S. is aging while the fertility rate declines and immigration slumps, the current housing market may already be overbuilt.
U.S. population trends are similar to what happened in Japan two decades ago, Zelman and McGill say. In Japan, the population started shrinking in 2011 and last year, the country experienced its biggest drop on record. In the U.S. births have been below the rate required to keep population levels the same absent immigration since 2007. Immigration has been slowing since 2016. Net international migration added just 247,000 people to the U.S. population last year, less than a quarter of what it did in 2015. And the first baby boomers, born between 1946 and 1964, are about to turn 80, which means they’ll start to either pass away or sell their homes and downsize, which adds inventory to the market.
U.S. builders have treated these demographic shifts differently than Japanese builders did, McGill said in an interview. Even before Japan’s population leveled off and then started shrinking, developers there slowed the pace at which they were building housing. In Japan, new home building fell from 14 million between 1990 and 2000, to 11 million between 2000 and 2010 and declined further to 9.1 million between 2010 and 2020. While Japanese builders took population declines into account when planning, McGill says U.S. builders are ignoring it. “Everybody on the development side is looking backwards and saying, ‘Well, we’ve always had a million and a half housing starts a year, so we should get back to that,’ but they’re completely ignoring the fact that the demographic underpinning is different,” he says. “They’ve convinced themselves there’s a huge supply shortage.”
Markets including New York, Los Angeles, Chicago, Pittsburgh, Detroit, and Cleveland have all posted below-average population growth in each of the last 11 years, he says, suggesting that demand could taper even more in those areas.
Nationwide, the pace of household formation has long been slowing, a reflection of the slowing birth rate, aging population, and later age at which people marry and have children. (Household formation measures both when people join together and live in a home, and when people die or move out of a home.) While there were13.7 million new households formed between 1990 and 2000, that number fell to 9.5 million between 2010 and 2020.
A decline in house prices
McGill says housing prices could fall as soon as 2023, because, he says, builders have been overbuilding based on U.S. demographics. “Our research is saying there’s something significantly negative coming,” he says.
Of course, changes in demand are all a matter of public policy. The Federal Reserve increased interest rates, which slowed demand. And the U.S. stopped welcoming as many immigrants beginning in 2016, which also tampered demand. This could change, if Congress passes a change to immigration laws, but Zelman thinks it’s unlikely.
The percentage of Democrats (83%) and Republicans (38%) who agree that immigrants strengthen the country, according to the Pew Research Center, is at its greatest partisan gap since at least 1944.
McGill says that anyone who wants home values to rise rather than fall should support immigration. “If you want your economy to grow, you need population growth. It’s that simple,” he said.
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