Signs Are Pointing to a Slowdown in the Housing Market—At Last
JEveryone agrees that the main reason why home prices rose 34% over the past two years was because of a high demand but low supply.
The U.S. could be in a critical moment, with many properties coming on the market as demand slows. Analysts say this is a turning point. That means prices could level off—and, depending on demographics, even start to decline.
It is no surprise that prices continue to rise. According to the National Association of Realtors’ (NAR) data, April saw a record-breaking $391,200 median sale price for existing homes. This is 14.8% more than a year ago.
Learn more Why Phoenix—of All Places—Has the Fastest Growing Home Prices in the U.S.
There are other indicators that indicate the slowing of the burgeoning demand for housing. The cost of the median house’s monthly mortgage payment jumped 27% in the past year after the Federal Reserve increased interest rates. The NAR reported that existing home sales dropped 2.4% in April for the third month straight. Redfin, real estate brokerage, says April saw 60.7% less home sales than the 63.4% and 67.4% of comparable offers. 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. The Census Bureau also reported that April saw a decrease of 4.6% in permits for single-family homes compared to the previous month.
This slowdown in demand is occurring as the U.S. market for housing finally sees a surge of new-built homes after more than 10 years of cautious homebuilders, scarred from the Great Recession. Biden’s administration expects more units to be completed in 2008 than ever before. There were a record number of single-family units under construction in April—815,000—the most since November 2006. The Census Bureau reports that there are currently 826 000 multi-family units in construction. It is the most since 1974.
“There are an enormous number of housing units under construction,” says Bill McBride, the author of the blog Calculated riskIn 2005, he correctly predicted that the housing bubble would burst. Since then, he has been a trusted source for market analysis. McBride believes that prices will fall and might flatten this year due to a decrease in demand and increased supply. The U.S. currently has about 2 months supply, which would mean that it will take approximately two months to get all homes on the market. However, McBride says that prices could stall when that number reaches six months.
Supply-chain problems have delayed some of these constructions, but they are being addressed now. As progressive states and cities ease restrictions on building, there are more housing units under construction to address the affordability crisis.
California has, in effect, banned single-family zoned and allowed cities to build multifamily housing. They went into effect on November 1, but they may slowly start to show up in certain neighborhoods, as homeowners begin to build additional dwelling units (ADUs), in their backyards to expand the supply. Oregon effectively abolished single-family zonation in 2019. A similar Maine law is in the works. States and cities have also removed the requirement that houses be built with parking spaces. This allows for an increase in density.
Is there a housing bubble in the United States?
Like most analysts, McBride says we’re not in a bubble‑—lending standards are different, for one thing. According to McBride, the current situation is similar to the 1980s. In that time, interest rates increased and home prices dropped, 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 forecasted in 2015 that there would be a huge increase in demand for 2020s as an increasing number of Americans entered the age bracket between 30 and 39, which is the prime time to buy a home. However, Census data indicates that this group is smaller than expected. This could be due to a combination of the opioid epidemic as well as 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.”
The availability of remote workers by companies will have an impact on regional demand and supply. Recent research has shown that half of home prices have seen their growth in remote working. This is because people moved into areas they desired to live but there were limited supplies. Companies could reverse policies that allowed workers to work from home, which would slow down demand in some 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. McGill and Zelman say the U.S. is ageing, and the fertility rate and immigration rates decline respectively. The current housing market could be already overbuilt.
Zelman and McGill state that the U.S. population trends mirror those in Japan twenty years ago. Japan saw its largest ever decline in population starting in 2011. The U.S. has seen a drop in births that is below what’s required to maintain population levels without any immigration. The pace of immigration slows down since 2016. The pace of immigration has slowed since 2016. 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.
McGill explained that U.S. builder have not treated this demographic shifts the same way as Japanese builders. Even before Japan’s population leveled off and then started shrinking, developers there slowed the pace at which they were building housing. Japan saw a decline in new home construction from 14 million homes built between 1990-2000 to 11 million by 2010 to 10.2 million respectively. This number dropped further to 9.1 millions between 2010 to 2020. McGill states that while Japanese builders take population declines into consideration when designing, U.S. builder are completely ignoring them. “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.”
According to him, markets like New York, Los Angeles (Chicago), Pittsburgh, Detroit and Detroit have seen below-average populations growth for the last eleven years. It suggests that these cities could see a slowing of demand.
Nationally, household formation has been slowing for a long time. It is a result of slowing birth rates, an aging population, later ages at which people are married and having children, and slowed growth in the national economy. Household formation is when two people live together in the same home. It also includes when one person dies or moves out. There were 13.7million new households between 2000 and 1990, but that number has fallen to 9.5 million between 2010-2020.
A decline in house prices
McGill predicts that house prices will fall in 2023 due to overbuilding, according to U.S. demographics. “Our research is saying there’s something significantly negative coming,” he says.
Public policy can affect changes in demand, but that is not the case. Demand was slowed by the Federal Reserve raising interest rates. The U.S. also stopped accepting as many immigrants in 2016 which also affected demand. This could change, if Congress passes a change to immigration laws, but Zelman thinks it’s unlikely.
According to Pew Research Center the gap between Republicans and Democrats (38%) is the largest since 1944.
McGill stated that immigrants are a good option for anyone wanting to see home values rise, not fall. “If you want your economy to grow, you need population growth. It’s that simple,” he said.
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