Update 543 — Survey of U.S. Housing
Impact of Shortage, Price Spike, COVID
Despite the pandemic and economic crises, the U.S. housing market is seeing more sales than any year since 2006, with the high volume expected through 2021. Low-interest rates and cheap mortgage terms have fueled demand among Americans of means looking to move or buy. This demand and chronic supply shortages are pushing home prices to record highs. The median price for existing homes has risen 25 percent since May 2020. And rental prices are skyrocketing nationwide too.
The housing market is a crisis for many Americans while others are benefiting richly. Low-income earners are locked out of homeownership while others accrue wealth from asset appreciation. Without action, the market will deepen the two-track recovery. Today, we look at the housing market, its effect on renters, buyers, landlords, and sellers, and what Washington is or isn’t doing.
Good weekends, all…
State of the Housing Market
As sectors across the country took massive hits from the pandemic, the homeownership market emerged as an outlier putting up record numbers. Since the beginning of this year, the median housing price has gone up by more than $31,000. From May 2020 to May 2021, prices increased by 23.6 percent. Houses are flying off the market at record speed with listings lasting just six days on average. Demand for housing has far outpaced supply during the pandemic, exacerbating an already prevalent problem in the market. Prices continue to rise and housing becomes less and affordable across the board.
Median Sales Price of Houses Sold in the United States
The pandemic had a significant impact on the housing market. Around 16 million Americans have relocated, many of whom are wealthier urban residents opting for cheaper, more remote locations. As viral threats emerged and work from home became more widespread, homeowners moved away from urban centers, paying lower prices and cheaper mortgage rates than many years prior.
Long and short-term supply shortages have also contributed to higher costs. Twenty-year housing construction numbers are 5.5 million units short of historical levels. The pandemic has only further delayed construction as stay-at-home orders and purchasing delays created holes in supply chains. The number of existing homes on the market fell to 1.03 million units in January, a record low. Supply chains have further decelerated construction of new units, as shortages in appliances and lumber have driven up costs and halted projects for months.
With prices soaring and supply not keeping pace, the U.S. housing market faces a looming crisis. Prospective buyers in the lowest one-fourth of the market are at risk of being squeezed out altogether. Millions of renters and low-income Americans face extreme barriers to affordable housing access, especially given the end of the extended eviction moratorium on July 31. Despite the allotted $46 billion in pandemic relief packages for rental aid, much of those funds have yet to reach tenants or landlords, something the Biden administration must prioritize in the coming weeks. If the pace of disbursing rental relief does not pick up, landlords may hike rents further and cause a spiral, damaging the economic recovery.
Federal Reserve and the MBS Market
The Federal Reserve has become a more critical player in the housing market since the beginning of the pandemic. It has engaged in a large-scale, and continual, purchase of asset-backed securities — at a rate of $120 billion a month. Of those monthly purchases, $40 billion each month have consisted of mortgage-backed securities (MBS). As of July 1, the Fed controlled $2.3 trillion in MBS — about 30 percent of the MBS market. The Fed’s concentration on purchasing new mortgage debt contributed to driving the 30-year fixed-rate loan interest rate to a record low in January 2021.
In recent weeks, three Fed regional presidents have expressed concerns that the Fed’s growing balance sheet might be contributing to the heating housing market. With the Fed expected to announce in the coming months that it will start to taper its asset purchases, some observers and these presidents have questioned whether the Fed might taper its MBS purchases at a faster rate than its Treasuries purchases. Even the potential of such a policy has already affected the market: MBS prices have declined in recent months as investors anticipate the possibility of an asset taper.
The Fed has not made a final decision on tapering. Several participants in the Federal Open Market Committee’s June meeting expressed interest in reducing the pace of MBS purchases quicker than Treasuries. The effect of doing so could be an increase in mortgage interest rates as the Fed reduces the pace at which it buys mortgage bonds. If the Fed signals to investors that it is prioritizing an MBS taper, that could lead to a further decrease in the market price of MBS.
The 2013 “taper tantrum” offers a cautionary example of the market reacting adversely to a sudden Fed policy change. But other FOMC participants in June argued in favor of reducing purchases of the two asset classes at similar rates. This reflects some analysts’ views that tapering MBS purchases quicker would have only a marginal effect on mortgage rates or housing prices. Ultimately, the tone of the message the Fed sends to investors could have a greater impact on the housing market than the actual implementation of its policies.
A Vacuum of Leadership
Resolving the housing supply shortage is beyond the capacity of state and local governments and thus, the federal government must take it upon itself to fill that void. Proposals from Congress and the White House have begun to tackle the issue; however, there is room for bolder leadership.
A bipartisan group of Senators crafted legislation to incentivize localities to upzone land, increase housing density, and end exclusionary zoning, which has significantly constrained housing supply. The White House supports the effort and has tied housing into the American Jobs Plan with a new $5 billion grant program to incentivize localities to eliminate exclusionary zoning.
Zoning reform is a good start, but investments in constructing new and rehabilitating old units would go further. The House Financial Services Committee, led by Representative Maxine Waters, has proposed $100 billion to restore the nation’s public housing stock. The White House has proposed over $300 billionin direct spending and new and existing tax credits to build new and rehabilitate old housing units across the country. To properly address the dearth of housing, the government must consider a larger budget for direct spending and further get directly involved in constructing new housing.
Housing as Infrastructure
As the Fed, White House, and Congress begin to chart out policies for a post-pandemic housing market, a crisis looms on the horizon. Millions of low-income households had to rely on savings or debt to maintain their housing while prices skyrocketed. Another group of households and investors is riding the potential bubble with savings built up during the pandemic and buying up homes en masse. The Fed should be cautious not to hinder the recovery in the housing sector in tapering down its MBS purchases. Meanwhile, the White House and Congress should pursue bolder direct investments beyond the current proposals to upgrade, improve, and expand the nation’s housing stock. Roads, tunnels, broadband, and telecom are no less integral to infrastructure than the physical infrastructure of our homes.