Another Housing Bubble

A recent episode of the Planet Money podcast talked a bit about the current housing crunch and the reasons for some of the biggest price increases in housing for decades. To quickly summarize, the Planet Money folks focused on the supply side of the issue, and identified 3 converging trends in 2021: older generations of people are staying in their homes longer; local cities and counties are not building fast enough and dense enough; there’s now a dearth of skilled builders after the 2008 housing crisis dampened the sector as a whole1. The historically low interest rates also play a part, essentially translating into bigger mortgages with more dollars that would be paid to interest now paid to the principal of these loans, which ultimately squeezes sales prices higher.

Then there’s COVID. It’s not clear why housing prices didn’t shoot up when cities and states initially locked down and induced demand for suburban houses over downtown apartments, but the pandemic has indeed normalized working remotely, and that has meant that what may have been a localized housing crisis in normal times2 is now a national phenomenon. COVID has also brought so much disruption to shipping logistics that the uncertainty has created its own knock-on effects, such as builders hoarding lumber and exacerbating the pricing bubble. At least that has seemed pop in recent months, and raw building materials won’t be nearly as extravagant a commodity.

The most obvious question to ask is: are we in a housing bubble, or has COVID pulled forward the housing market by a decade and is establishing the new normal? When COVID is finally in the rearview mirror, what are the housing behaviors that it would have permanently changed, and what will snap back to pre-pandemic norms once the threat of contagion ceases?

On the definitely-temporary front: people will move back to cities and offices, building material logistics and shortages will stabilize and continue unabated, mortgage rates will rise with interest rate jumps.

On the perhaps-permanently shifting side: the demand for large living spaces with dedicated offices will decline, but office work has substantially tilted towards more distributed employee populations, which disburses housing demand beyond the biggest cities.

And the unrelated-problems list: housing supplies are still massively constrained and real solutions will require a combination of policy advancements and shifting attitudes.

All that said, there are some early signs that pulling prices up this quickly, without a corresponding and proportional increase in income and savings, is starting to reach its limits. Houses are quickly becoming too expensive to afford, and new home sales have fallen just in June. With the Delta variant throwing a giant wrench into summer reopening plans, the push to return to offices and commercial districts has ebbed a bit, which in turn casts additional uncertainty to office workers who aren’t sure whether they should move back to metropolitan areas or stay put in the suburbs. And much like unemployment, there’s an abandonment factor to consider: a certain percentage of buyers have given up trying to move into a new home, often after losing just one too many competitive offer situations.

And yet! I’m somewhat bewildered to report that our family dealt with all of this first-hand, that we looked for and eventually succeeded in buying a house in the Bay Area in the middle of a pandemic3. That story, though, I’ll save for another time.

  1. In California, we have the added bonus of years of wildfires necessitating reconstruction of destroyed homes, which occupies workers even moreso.

  2. I.e., The Bay Area has not been building enough housing for decades.

  3. Also a ton of work: mortgages, renovations, and moving.

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