Leading up to the pandemic, the housing market was stable. New home builds — “housing starts”— were increasing, and the average number of days a given house was on the market was declining. The demand behind this was a strong contributor to the increase in housing prices over the last decade. According to the U.S. Census Bureau, the median home price at the end of 2019 was $329,500 — a 48% increase since 2012.
Yet, home builders were uncertain if the demand would continue. Though it was clear there were plenty of willing buyers in the market, housing inventory was steadily declining and unable to keep up with the strong demand it was facing.
The onset of the pandemic only worsened the lack of supply in the housing market. Nevertheless, though construction companies were forced to halt for a brief period, housing demand remained strong, pushing prices even higher. This article looks at the bull and bear cases for the housing market moving forward.
Bull case: Moving on and moving in
While U.S. housing prices are rising at a significant rate, U.S. housing inventory is declining even more rapidly: Since 2016, it’s declined over 60%, and prices have increased 29%. The main risk to the housing market is the dramatic run-up in prices due to further supply constraints, potentially pricing out of new homeowners’ range. However, with millions of vaccines being administered each day, seller sentiment may be due for a shift. More certainty surrounding the pandemic could be the push that homeowners need to sell.
While the pandemic caused minor shifts in short-term trends of the housing market, the overall theme parallels pre-pandemic levels: The demand for homes is far outpacing the current supply. A realtor.com survey found that the pandemic has led 41% of respondents to look at purchasing a home sooner than originally planned; record low mortgage rates were likely a strong contributor. This shows a clear interest from homeowners to begin moving again — a positive sign for a stagnant market.
However, in recent months, the cost of materials for home builders has been rising. Despite this, the National Association of Home Builders’ monthly confidence index increased by a point to 83 for April. This confidence is backed by seemingly unwavering demand, even with construction supply chain issues. Alongside this, there’s been a strong recovery in U.S. housing starts and authorized permits, exceeding pre-pandemic levels in six months.
Bear case: Growing inflation brings shrinking confidence
The housing market is at an important point, as the house price index (HPI) has surpassed the 2008 housing market collapse by over 25% — on a percent basis, it outpaces inflation over the same time frame. The recovery of housing prices following the collapse of the market didn’t begin until 2012 — since then, HPI has increased 53% and consumer price index (CPI) only 14%.
The house price index is a measure of the average change in house prices in the U.S. and the consumer price index is a measure of the average change in prices of consumer goods in the U.S. — generally used to measure inflation.
The dramatic rate at which housing prices have increased relative to CPI may signal more of a supply crunch than construction workers can keep up with. The inability for home builders to manage demand can be seen in the average number of days a house is on the market — near record lows. While homeowners are staying put, home builders are in a crunch to deliver. While strong demand and lackluster supply may explain the rise in prices, the conditions of a market with such little supply are increasingly uncertain. In recent months, home builders were met with higher costs for supplies, and a subsequent decline in construction of new homes ensued. This calls into question whether home builders can sustain the consistent growth that the housing market needs to stabilize.
In an environment of low inflation, inflation- adjusted home prices are expected to converge with home prices. However, the Federal Reserve has set expectations for inflation at over 2% for the foreseeable future. This could have a profound effect on home prices and prove to be too much for new entrance into the market. In a recent analysis by Freddie Mac, a mortgage loan company, the U.S. housing market is short 2.5 million units compared to current demand. The shortage is especially prevalent in entry level homes, as millions of younger U.S. residents are beginning to enter prime home-buying age.
The theme of the housing market reaches all the way out to Rockingham County. Active listings have been declining and prices have been on the rise.
That being said, the state of the market in Harrisonburg is a lot less fragile. Landlords will always be looking for the next opportunity to purchase a house to rent to students, and prices haven’t been seeing the same increase that’s prevalent across the U.S. However, further decline in listings could push the market into trouble and prices higher, but in its current state, the market looks stable.
It’s evident that there are pockets in the market with rising prices contrasted by other areas, such as Rockingham, where supply isn’t as much of an issue. Moving forward, it’s imperative that prospective home buyers monitor the market, searching for areas that may be less supply constrained.
Connor Riley is a junior finance major. Contact Connor at email@example.com.