While there have been fears expressed by some of a repeat of the housing bubble that led to the housing crisis just over a decade ago, numerous real estate analysts say they believe the market fundamentals are much stronger now and that the sharp increase in home prices reflects low rates, a lack of inventory, and demographics.
To be sure, the market is hot in many markets, with home sellers receiving multiple cash offers, often over the listed price, on homes. Some analysts, including those at Swiss banking giant UBS, have published charts showing how home prices are outstripping both wages and rents, reported USA Today. Home prices have appreciated more than 60% since November 2012, incomes have only appreciated by 20% and rents by 30% over the same time period, the report added.
“But unlike the real estate boom that led to the Great Recession, this nationwide price spike is not being fueled by a wholesale collapse in lender ethics,” USA Today reported “There aren't any low-doc or no-doc loans to be had and borrowers are having to do much more than fog a mirror to get funding.”
‘Chronic Lack of Supply’
"For over a decade, we've had a chronic lack of supply of housing," Marco Santarelli, CEO of Norada Real Estate Investments in Laguna Niguel, Calif., told USA Today. "We need 1.62 million units a year to keep pace with organic demand, but we produce significantly less. We're about 370,000 units short each year."
Santarelli added that the supply imbalance will only get worse as more than 140 million millennials and members of Gen Z move into rental units and starter homes in the years ahead.
"About 52% of young adults from 18 to 29 are still living with their parents," Santarelli told USA Today. "That's the highest rate in over 110 years. These people have to go somewhere and that's why I'm so bullish about real estate over the long term."
Out of Balance
But healthy fundamentals don't mean there aren't worrying distortions in the market, USA Today added.
“With the Federal Reserve continuing to buy Treasury bonds and other securities under its quantitative easing program, interest rates are being held artificially low as dollars are being pumped into the economy,” USA Today stated. “That makes borrowing cheap and encourages investors to buy riskier assets like stocks and real estate, driving prices of those assets ever higher.”
The analysis acknowledged that at a certain point, interest rates will rise and there won't be enough buyers coming in from more expensive markets to keep paying the higher prices. “Either development, or both, could lead to a pullback in prices,” USA Today said.
Also playing a role: the moratoriums on evictions and foreclosures are distorting the market and it’s not clear what will happen when the moratoriums are lifted.
And in many markets, rents have been dropping. In San Francisco, rents fell 24% in 2020, according to Zumper.com, which tracks rents across the country. Rent were downs nearly 20% in New York and 17% in Boston.
Rents Head in Opposite Direction
But in other cities like Newark, N.J., Sacramento, Calif., and Richmond, Va., where people are relocating, rents are moving sharply in the opposite direction.
Median home prices in cities experiencing major out-migration, however, have not fallen – at least not yet. New York, for instance, saw rents drop by 20%, but its median home prices rose 6%. The same trend holds true in San Francisco, Boston, Los Angeles and Washington, D.C., USA Today added.
"We had a 10.2% increase in home prices in Sarasota (Fla.) in 2020," one analyst told USA TODAY. "What I'm concerned about is that prices will continue to appreciate at 10% to 15% a year and that's not sustainable."
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