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A Perspective on the Housing Market

At the outset of the pandemic it was my view that housing prices would decline.  Many sectors of the economy immediately shut down as workers and affected industries were either furloughed or laid off.  As it turned out, unemployment largely impacted lower income workers as most white collar employees retained their jobs and worked from home.   Desiring more space, many white collar workers fled the cities and the demand and prices for suburban homes skyrocketed aided by favorable financing when 30 year mortgage rates plummeted to less than 3%. 

            Furthermore, supply chain issues and a misread of baby boomer and millennial housing preferences fueled this rise.  Prior to the pandemic and based on an analysis of the 2019 housing market, lumber mills reduced their output.  Fearing a significant decrease in demand for new construction as the economic impact of the pandemic unfolded, lumber yards immediately slashed orders from mills further reducing supply.  The result was that lumber prices rose more than 112% from February 2020 to February 2021 raising construction costs by an average of $26,000 for a new home.  Meanwhile, in order to meet organic growth arising primarily from the formation of millennial households, it has been estimated that 1.62 million new residences annually need to be built but production has fallen short by 370,000 units. 

            For years, most housing analysts projected that there would be a glut of homes on the market as aging baby boomers downsized.  In fact, the opposite trend has occurred.  During the pandemic, 57% of existing homeowners did some type of remodeling as they were confined to their homes.  The majority of these homeowners were retirees.  Furthermore and according to a recent Del Webb study, 22% of baby boomers between 50-60 years old are looking to actually upsize their homes.  The study also revealed that another 43% wish to remain in their existing home or move to one with comparable space in a new location. 

            With these trends seemingly confirming that housing shortages will persist thus continuing the escalation of prices, what factors could derail these predictions?  As the interest rate for 30 year mortgages has recently surpassed 3%, many marginal buyers for starter homes have effectively been priced out of the market.  This may result in a domino effect as homeowners who wish to upsize may be stymied if they are unable to sell their homes.  Furthermore, while white collar employment  remains robust, incomes have generally not risen sufficiently to afford higher home prices. 

            As urban areas reopen, individuals are gradually returning to the cities and prices are beginning to rebound.  This reverse migration should reduce demand for housing in the suburbs.  Meanwhile, rents have fallen dramatically in the cities as a result of the 2020 exodus.  It is likely that many individuals who may have been in the market to purchase a home may decide to take advantage of rent decreases to increase their savings while waiting for a decline in housing prices.    

            The final trend that may have a profound impact on high priced suburban markets such as Boston, San Francisco and New York is that many employees whose jobs are technology based will continue to work remotely at home even as other workers return to their offices.  For example, in Silicon Valley, many employees have opted to move to less expensive and more spacious states such as Idaho and Utah while retaining their jobs.  If this trend were to continue, demand for housing in expensive suburbs should soften. 

            I don’t believe that we are in a housing bubble similar to the mid 1980s or more recently 2008-09.  But housing prices rose 10.6% nationally from February 2020-2021 the largest annual jump since 2006.  I am convinced that this escalation will revert to historical norms in the near future.  For sellers who live in a pricy region and wish to move to a less expensive location, the current environment represents a great opportunity.  For prospective buyers in hot markets, the best move may be to wait for demand to cool.   Like any other asset, housing prices are cyclical and both buyers and sellers should plan accordingly.   




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Clifford L. Caplan, CFP®, AIF®                                                                                      Stephen Caplan, CSLP®