Impact from the 2008 Crisis, Covid-19, and a Rapidly Changing World
Mar. 9, 2024
How do we Measure the Residential Real Estate Market?
We separate the different factors necessary for our consideration into the following 4 buckets:
1. Supply and demand of housing
On the demand side, with home prices at record highs, many buyers are struggling to afford homes, especially first-time homebuyers. The affordability challenge, combined with rising interest rates, could lead to a decline in demand and therefore a reduction in prices. Then, we look at personal income. If real incomes rise faster than inflation, the combination of extra purchasing power plus lower mortgage rates could boost affordability, home sales, and prices. Buyer’s expectations for themselves and the economy also play into the demand side of this. There is increasing optimism for the economy to get better, thus people may become more willing to make their home purchases.
On the supply side, price of housing is expected to increase still but at an increasingly slower rate. Home prices have been holding onto their gains due to lack of supply, but as lending rates fall, more homes will be listed for sale, helping to depress housing prices. We do see a current lack of supply because of the lock-in effect where homeowners are unwilling to sell their homes because they are unlikely to match their current interest rate. However, while more than half plan to wait until rates decline before selling, a quarter say they'll sell now anyway since housing is highly depending on current family needs and desire to earn a profit. We also see a decrease in construction costs from emerging technologies to keep up with housing demand. Newly constructed homes will make up much of pent-up housing demand due to builders' ability to buy down mortgage rates. With this new supply, rents will stabilize and more closely track inflation rates, keeping home sales stable.
2. Mortgage rates
Loan prices have been very high for the past few years since the Federal Reserve is raising interest rates to combat inflation. However, in the subsequent years, a reversal in this trend is projected, as interest rates are anticipated to gradually recede, culminating in a resurgence of housing demand.
3. The monetary system
Inflation (which goes along with high interest rates), US Treasury policy changes, the Mint, FDIC regulations, Federal Home Loan Banks, and the Federal Reserve’s decision to change the discount rate, reserve requirement, and federal funds rate could all impact the future of the housing market.
4. Other indicators influencing the market
Things like strong job growth, population growth, and a limited supply of land will continue to make for a competitive housing market, which is why some may argue buying now if you can afford the loan will result in more affordable home prices due to less competition.
The Aftermath of Covid-19
The market was driven higher during the Covid-19 pandemic by record low borrowing rates, encouraging purchases by first-time buyers, and a lack of supply because of under-building. Furthermore, some homeowners were hesitant to sell during the pandemic but are looking for opportunities to put their houses on the market now. This is why after falling to a 28-year low in 2023, existing home sales will gradually rebound as mortgage rates decline.
Lasting Implications of the 2008 Financial Crisis
The 2008 market crash has led banks to have stricter, more robust lending standards from Freddie Mac and Fannie Mae. Even though rising interest rates have increased the cost of mortgages for new buyers, prices are unlikely to fall as they did during 2008 because of these new standards. It is also now harder to become a loan agent because there are an added set of requirements, making it harder for people to find quality loans. Compared to 2008, though, we have a stronger labor market and a more stable financial sector. Thus, most economists don’t expect a similar crash to that of 2008.
The Changing World
Emerging technologies, changing demographics, the state of local job markets, and the rise of remote work. The outlook on AI and how much jobs will be impacted by AI can contribute to tomorrow’s trend as well. A negative outlook on AI, climate, and foreign relations could prevent people from buying. However, if AI is viewed as a net increase in productivity and wages, the world learns to adapt and prepare for a climate change, and if skirmishes in and between countries are contained, consumer sentiment could continue to improve even more. We also see different ways in which people live and work. More multi-generational households and co-living arrangements so that people can afford their new houses. Also, hybrid or remote work is now more common. Thus, if there is a decline in property tax revenues, that could lead to a dramatic cuts to city services and a decline in the quality of life, leading people to move out of major cities.