Housing Is Correcting, Not Crashing

We shared dinner with good friends recently, and they were in shock. They’d been thinking about downsizing, which brought them into contact with the frenzy that is the American housing market. The unit they wanted to buy was the object of 31 bids, and ended up selling for 30% over the list price…without a contingency for a home inspection.

It has been difficult to square this account (which is not at all isolated) with warnings of impending trouble for residential real estate. Conditions in the industry are no longer perfect, but they are not bad at all.

When the pandemic emerged, the housing sector was of significant concern. Increases in unemployment and depreciation in asset markets raised the possibility of widespread foreclosures and evictions. To cushion the blow, loan forbearance programs and eviction moratoria were implemented across the United States. Fortunately, a crisis was averted.

The housing market was also a substantial beneficiary of broader COVID-19 support programs. Households received stimulus checks and extended unemployment benefits. The Federal Reserve initiated a huge quantitative easing program, which brought down long-term interest rates. Part of the program found the Fed purchasing mortgage-backed securities, which further improved financing conditions for residential property.

The results exceeded expectations…maybe too much so. Fiscal stimulus came at a time that many families were seeking more space to accommodate remote work. Mortgage rates hit 50 year lows. The combination of these factors contributed to a huge surge in housing demand. The inventory of homes for sale has been constrained for a decade by headwinds facing contractors; tangled supply chains have made construction even more difficult over the past two years.