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Politics & MoneyReal Estate

Should government help create housing market supply?

The only cure may be higher mortgage rates

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If demographics are economics, and we accept that in the years 2020 to 2024 the U.S. will have the best housing demographics in history, then it follows that home prices could take off in an unhealthy way. In 2021, we already have the unhealthiest housing market — in terms of low housing market supply and multiple bids for each sale — that we have had in the last 10 years.

Adding to the built-in demand from excellent housing demographics, our recent history also contributes to the hot market. One of the COVID-19 pandemic’s economic realities is that U.S. bond yields and mortgage rates have been sent lower than what would have occurred in an expansion or a traditional recession. 

Additionally, the COVID-19 pandemic disrupted the natural housing market supply, keeping inventory lower than it usually would be. Low inventory, low mortgage rates, and built-in demand — what do you think would happen with home prices given this perfect storm?

The only proven pressure release valve we have at our disposal to calm this price-growth storm is higher mortgage rates. Only higher mortgage rates have the recent historical precedent for cooling the market and creating more days on the market, thus boosting inventory.

Let me give you two examples of what I am trying to say here.

Here is our historical precedent. In 2013, housing pundits said that there was “record-breaking demand, but we have no homes to buy, which is holding down sales.” When mortgage rates went up that year, the rate of growth of home prices fell. Home prices did not go negative, year over year, but the rate of growth fell noticeably. Demand got softer. In 2014, mortgage purchase applications were down 20% year over year and remained so for some time. The builders missed sales estimates.

Secondly, in 2017, existing home sales did slightly better than I predicted. Again the housing pundit’s narrative was that sales would have been better if inventory was better. In 2018, I forecasted negative sales growth and increased inventory year over year, but warned that we shouldn’t overreact to this. That year mortgage rates rose, and we had over 12 months of negative demand compared to the previous year.

After mortgage rates went lower in 2019, the market found a solid base to end 2019 roughly flat year over year for the existing home sales market. The higher inventory for the new home sales sector meant the builders had housing supply shocks, resulting in a halt to new developments. The builders’ reaction to the increase in housing market supply made everyone very nervous about housing. However, once again, lower rates created that inventory to drop back then, and things went back to normal. 

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