What’s Up With the US Housing Market?

By now, everyone and their mother knows that the housing market is white hot. Unless you’ve been living under a rock for the past 12 months, you’ve heard about prices increasing to record levels, buyers fighting over homes, and homes selling for way over the asking price.

But why and how is this possible? Is this 2008 all over again? Let’s break it down in terms of supply and demand.

Prior to The Great Recession and Housing Crash, demand for buying homes as well as the supply of homes being built, skyrocketed. Everyone was buying homes and everyone knew someone who was in the home building business.

The demand for homes was largely due to how easy it was to obtain a loan. People joke around now about how as long as you had a pulse, you could get a loan for home. No credit check, no proof of income, no proof of assets, no problem. Watch a movie called The Big Short if this is new to you. On top of people qualifying for loans that probably shouldn’t have, a loan product called Adjustable Rate Mortgages (ARMs) were heavily abused. Many borrowers were suckered into these loans without being educated on the product itself. The name of the product itself should alert borrowers that the rate will adjust at some point, thus making your monthly payment increase, but I wouldn’t be surprised if borrowers never even heard the term ARM when they were applying for the loan. All they knew was that they could afford the initial payment based on the initial rate, and the people approving the loan probably didn’t care because they were cashing in check after check during this time. A ton of people on fixed incomes had these loans, and when their interest rate adjusted as scheduled, they could no longer afford the monthly payment. This became a ticking time bomb and eventually a large majority of these people defaulted on their loans which obviously tanked the demand to buy.

On the supply side of the equation, homes were selling as soon as they were available so of course builders had an incentive to build, build, build and investors/banks had an incentive to keep supplying more capital to the builders.

Eventually the scales tipped. There was WAY too much inventory, demand dried up, and boom: The Great Recession.

Here’s how things are different now:

Going into 2020, there was already a massive lack of inventory and demand was “normal”. When Covid hit, the level of supply took a massive hit. Many builders shut down their operations, and many would be sellers held their breath and decided to wait things out (not to mention many being terrified to let strangers into their homes for showings). In an effort to stimulate the economy, the Fed dropped its interest rate near 0. Mortgage rates responded and reached lows of around 2.5%. Well it certainly worked and all of a sudden, everyone wanted to take advantage of these historically low rates and either refinance their current home or buy a new one. Additionally, being cooped up inside made a lot of people realize that they weren’t happy with their home, needed more space, a home office, etc. There was only one problem: Supply.

By the summer of 2020, the amount of buyer demand was probably 10 times or greater than the supply. In my business, I personally had a listing receive 74 offers in 2.5 days of being on the market. This disproportionate nature of supply vs. demand is why everything seems so crazy and prices have gone sky high.

There are a ton of mixed reviews but the bottom line is, nobody knows what’s to come in the near future. It will have to cool off at some point, but it won’t be until something causes demand to fall and gives inventory levels a chance to catch up.