It’s undeniable that the housing market has gotten more and more competitive over the past year, despite the economic challenges of the pandemic. Many factors have contributed to this unusual phenomenon. At first you might think that the housing shortage is a result of the rush of demand in 2020, but it actually started years before. The housing shortage itself is one of the causes of the increasingly competitive housing market and recent surge in housing prices.
Unlike other recessions, according to the St. Louis Fed, the supply of housing in the US dropped over the course of 2020. Dropping from 6.6 months in January 2020 to a low of 3.5 months in August of 2020 (meaning if no more houses were added to the market, the current supply would be depleted within 3.5 months). In previous recessions, economic downturn meant that there was less demand for housing as people either didn’t have the money to buy a home or decided to save instead, in case of a loss of income.
But the recession of 2020 was startlingly unique in many ways. Most relevant here is the way that it was unequal across income levels and job types. According to a report by the Brookings Institution, “low-wage workers are six times less likely to be able to work from home than high-income workers.” Those with low-wage jobs, service jobs, travel-related jobs, live entertainment jobs, etc. were much more likely to lose their job and their income due to the pandemic. But those in higher paying jobs were more likely to have office jobs. These could be retained and shifted to work from home.
And with some companies, including Facebook and Google, deciding to let their employees work from home for the foreseeable future, that created incentive for their employees to take this opportunity to choose where they wanted their home to be. Add being stuck in their current home, which might not have been chosen for space (and thus not contain a quiet and private home office space), but more for location and an easy commute (which may no longer be relevant). And add forced savings of money that would usually go to activities like eating at restaurants, traveling, and live entertainment. And as a cherry on top, add super low mortgage interest rates. Put these factors together, and you have a population primed to get into the housing market.
But what do they find when they start looking?
According to the US Census Bureau, in the 14 years between 2007 to 2020, builders started 9,914,600 homes or 708,186 homes per year. Which sounds like a lot, but it is 394,752 fewer starts per year than the historical average. Starts started dropping due to the housing crisis of 2008, which was already brewing in 2007. More foreclosures caused a drop in housing values, which created less incentive to build new homes. But the numbers of housing starts didn’t recover as the economy did.
Much of the under-served demand for new housing over the past decade has been in affordable housing. Young families looking for starter homes and retirees trying to downsize are looking at the same suburban homes. Young families want shorter commutes, retirees want closer proximity to doctors and other conveniences. But homeowners currently in the prime locations fought new construction. They worried about a drop in home value if denser, more affordable housing is built nearby.
Another huge factor in the low housing supply is the entry of investment firms into the rental market after the 2008 housing crisis. Homes that might have been sold to a new homeowner, were bought by investment firms to turn into rentals. Abundant foreclosures and desperate sellers allowed these firms to pick up many homes in prime locations at very low prices. And the dependability of rental income means that many homes bought this way haven’t re-entered the market.
And then there’s 2020. Eviction and foreclosure moratoriums mean that homes that might have entered the market, haven’t. But these measures have meant that those who might have been in dire straights during the initial job losses of the pandemic have had time to recover. Even if evictions and foreclosures might have boosted the housing supply, the economy might have been significantly more unstable if they had been an option.
Finally, lumber prices. Lumber prices soared in 2020. Mills were forced to temporarily close or lower capacity, and also anticipated a drop in demand instead of a surge. This caused a lag in supply as mills reopened with new safety measures. Current homeowners leaned hard into DIY home renovations and buying new furniture. And finally, wood capacity is hard to ramp up quickly- companies cut back production by around 20% during the financial crisis, and still haven’t recovered.
Build, build, build. When foreclosures begin again, there will be a slight bump in the housing supply, but it won’t be nearly enough. Housing starts were up 8% in 2020, but have dropped again as supply problems have slowed production. But lumber prices are falling again after reaching a peak in May. So if the home building industry takes advantage, housing starts should rise again. Building takes time, and it’s likely to take a few years to reach the necessary levels to meet demand, but building is the foundation of the solution the housing shortage.
Another part of the solution? Supporting legislation that helps increase housing infrastructure. With support, zoning laws that have been held up for years might be able to make it easier for builders to create affordable housing where it is desperately needed.
Also, much of the increase in demand is in “secondary cities”- cities that, until recently, have been more affordable. With job locations much more flexible, “secondary cities” are looking much more appealing. But with the popular “secondary cities” going through a surge of demand, there is an opportunity for other cities that may have been overlooked to make a bid to enter the category. Even more rural areas that have seen population loss over the past few decades could entice a new population. Especially if they spread the word that they have available housing and invest in infrastructure, especially internet access.
The current housing shortage is not a simple problem. And the solution is not going to be simple, and will take some time to resolve. But if building picks up again as supply and vaccinations increase, we can start to see the beginning of that resolution. And home buyers will start to see a less frantic, more consistent housing market.
If you are looking to buy or sell a home, but have been intimidated by the current housing market, contact Geva and Jane. They have the experience needed to find and negotiate a home sale, even in this tight market.
Elizabeth Marcano, Writer for Geva and Jane Real Estate