Something Has to Give in the Housing Market. Or Does It?

Two years into the pandemic, rundown bungalows command bidding wars, buyers keep snatching up places they’ve never seen, and homebuilders can’t find enough cabinet doors for everyone who wants a new home. The median price for an American home is up nearly 20 percent in a year. The for-sale inventory is at a new low. And the hopeful buyers left on the sidelines have helped drive up rents instead.

All of this may feel unsustainable — the tight inventory, the wild price growth, the dwindling affordability. Surely something’s got to give.

But what if that’s not exactly true? Or, at least, not true anytime soon for renters locked out of homeownership today or anyone worried about housing affordability. There’s probably no quick reprieve coming, no rollback in stratospheric home prices if you can just wait a little longer to jump in.

“It’s not a bubble, it really is about the fundamentals,” said Jenny Schuetz, a housing researcher at the Brookings Institution. “It really is about supply and demand — not enough houses, and huge numbers of people wanting homes.”

Neither side of that ledger has a quick fix. And there’s little evidence to suggest the nation is in a hurry to correct the imbalance.

“My pessimistic view is that the economy is perfectly capable of running with unaffordable housing,” said Daryl Fairweather, the chief economist at Redfin. This was evident over the last decade, she said, when affordability worsened even as the economy continued to grow. And that reality has enabled politicians and the public to largely neglect the issue of housing affordability.

“Another way to phrase that is people will still get up and go to their jobs, even if they’re housing insecure,” Ms. Fairweather said. “That’s one reason to think we’ll still just keep letting this problem get worse.”

More housing construction will help — and it has been increasing — but the United States has been underbuilding for so long that it’ll take years to meet demand.

You might also expect home buyers to get fed up with soaring prices. But that answer falters in, say, Salt Lake City when asking prices that look absurd to local buyers seem reasonable to someone moving in from Seattle.

Today, first-time home buyers in once-affordable markets have competition from all kinds of sources that didn’t exist a generation ago: from global capital, from all-cash “iBuyers” that size up homes by algorithm, from institutional investors renting single-family homes, from smaller-scale investors running Airbnbs.

“It’s really hard for an owner-occupier to compete with the amount of money that’s flowing into this region,” said Dan Immergluck, a professor at Georgia State in Atlanta. There, even in a Sun Belt market with robust new housing construction, supply still can’t keep up with demand.

Perhaps at some point in the medium term, the geographic reshuffling of remote workers will settle down, calming price growth in places like Boise, Idaho, and Denver that have been most jolted by it. But the investor purchasers aren’t going away. Nor are new technologies that enable homes to sell at a much faster pace.

Rising mortgage rates should help slow the growth in home prices. But they won’t affect anyone paying cash. And higher rates will make home owning even less affordable.

“For first-time home buyers, they’re going to find it very, very difficult to get a home in the next two, three years,” said Mark Zandi, the chief economist at Moody’s Analytics. And in the meantime they’ll be paying higher rents, cutting into their ability to save for a down payment.

Working-class households on the cusp of homeownership before the pandemic may now need another five to 10 years to play catch-up, said Ralph McLaughlin, the chief economist at Kukun, a company that tracks real estate investment activity. The days of one-earner households buying a decent-quality starter home anywhere in the U.S. may be over, he said — unless that one earner is a high earner.

“As a housing economist, it’s kind of depressing to think that there may not be an undoing of the hardships that have been brought upon young households trying to get their foot in the door of the housing market” during the pandemic, Mr. McLaughlin said.

Those hardships have been remarkably widespread across the country. The last time such home price growth occurred was in the years leading up to the housing crash. But even at the height of the bubble in 2006, only about 40 percent of metro areas experienced greater than 10 percent annual home price growth. In the past year, 80 percent of metros have seen such spikes. And a quarter of all metro areas have had prices rise by more than 20 percent.

Widespread pain in the rental market has followed. In 2021, communities across the country experienced the kind of double-digit rent growth seen only before the pandemic in small oil or fracking boom towns, said Igor Popov, the chief economist at Apartment List. Now, he said, “it’s going to be challenging to imagine a world where the affordability concerns start to wane.”

None of this is rooted in the kind of risky borrowing that inflated the housing bubble. Rather, home buyers flush with pandemic savings and strong credit have been taking out conventional loans (if they’re taking out loans at all). The rental market has experienced a rise in higher-income households, too, at a time when new household formation has also surged with young adults who began the pandemic by moving back home.

Add to all of this a few more forces stressing the housing market even without a pandemic: Baby boomers who own a lot of housing stock are sticking around in their primary homes longer than previous generations did, at a time millennials have reached peak home-buying age. That ties up existing supply.

Local governments have further stymied new housing supply with zoning and building restrictions that will remain a problem even when home-building supply chain kinks resolve. And looking forward, climate change means that a growing share of housing supply that exists today may be uninhabitable or require expensive retrofits in the future, said Ms. Fairweather, the Redfin economist.

That is a lot to be glum about — unless, of course, you already own a home and are happy to see its value skyrocketing.

But that brings us back to Ms. Fairweather’s point about whether there’s much public appetite to curb housing costs at all.