A Tom Brady rookie card sells for $2.25 million. A two-bedroom, 1-bath house near San Francisco sells for $1.5 million. Bitcoin, which 99 percent of people would probably describe as “internet money,” is hitting $60,000. And all of this during a worldwide pandemic? Economists and analysts can point to all of these and explain the reasons why assets are increasing in value.
But let’s focus on real estate and home price appreciation, since you can lead a perfectly enjoyable life without football cards or bitcoin. Without a roof over your family’s head, things can be grim, and the increase in mortgage rates, the decline in affordability, and the lack of for-sale home inventory have consumers scratching their heads.
In much of the last year, home affordability improved with lower monthly payments and low rates have contributed to higher home prices. Although economists like to talk about inflation, and investors fear its impact on bond returns, the government measures of inflation have not indicated much of an increase.
‘We need space!’
But the opposite happened in 2020. People are focused on the pandemic, and their own spending patterns, rather than the government telling them something was more or less expensive than a year ago. Low rates did little to stimulate the economy, and the lack of travel and “work from home” environment led to a huge increase in savings overall. Low rates did, however, make mortgage payments more palatable – and, in many areas, less expensive than rent.
The pandemic also spawned a permanent move toward working from home for those who can. Millions of people around the United States transitioned from commuting every day to working from their home office. People’s homes became their hotel, restaurant, entertainment center and office. Professional couples in small apartments were cramped, and wanted a place of their own. A detached home became even more desirable than in prior years. “We need space!” became a universal cry.
Not only were large numbers of people able to take advantage of low rates, and have increased savings, but there are a lot of them. Millennials are in the prime age for buying homes. Roughly defined as people born between 1981 and 1996, there are now more than 70 million of them. More than Baby Boomers.
Given that U.S. builders are averaging about 1.5-2.0 million units a year being built, and the lack of Baby Boomers seeking to move into assisted care facilities, the demand for detached single-family housing is not expected to subside any time soon. And this has led to a decrease in available inventory of vacant homes readily available for purchase.
Competition, Inc.
Some home buyers even found themselves competing with corporate entities set on buying houses. Large corporations like Blackstone, Invitation Homes, American Homes 4 Rent, Main Street Renewal, Tricon American Homes and Front Yard Residential took advantage of the financial crisis from a dozen years ago and purchased nearly 200,000 single family homes and rented them out.
Most still own thousands of houses around the nation, often in major cities like Phoenix, Orlando, Las Vegas, Salt Lake City and Atlanta, and are collecting millions of dollars of rent each month. These companies are anxious to put their income to work by purchasing even more houses and renting them out. First-time home buyers and families seeking to buy a residence often find themselves in a bidding contest with a huge corporation – with predictable results.
Madness and mortgages
When or why might the “madness” end? A change in any of these components may alter the current housing situation. The United States has already seen a move higher in rates, impacting affordability of a monthly mortgage payment versus rent. As the pandemic appears to be flattening, companies have plans to bring workers back into the office, lessening the need for an office at home.
And saving rates are already coming down as people seem anxious to spend money to dine out, go to the movies or travel. A portion of Millennials are asking if home ownership is truly worth the cost and responsibilities that come along with it. Human psychology, business cycles and economics rarely turn on a dime, but there are shifts in all of these that may change the housing picture.
So, while we can track some of the causes and effects, we’re still left asking, When will the madness end? My two cents: Purchasing a home is a very individual choice. If the time is right for you and the market in your area will cooperate, go for it.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.