For homeowners in America, this feels like the best of times. The extraordinary housing environment we find ourselves in is due to a confluence of major factors, including strong demand, record price appreciation, record low interest rates, and rising inflation. Many of these factors, ironically, can likely be tied to the devastating economic consequences of the COVID-19 pandemic and the panoply of government programs and relief efforts that were forged in response.
Last year, in an effort to slow the pandemic’s spread and avoid overwhelming hospitals, many state and local governments imposed varying degrees of “lock-downs” on businesses, schools, and public transportation. Americans fortunate enough to be able to work from home quickly transformed into telecommuters and remote workers. With many kids home from school and parents using spare rooms for offices, home life suddenly felt more crowded for millions of families, which in turn stoked demand for larger homes with more space and bigger yards.
At the same time, unprecedented levels of government relief, jobless benefits, and stimulus programs kept cash flowing into consumers’ bank accounts. With fewer places to spend money in a shuttered economy, savings rates also soared to record highs. Some of this extra savings seemingly found its way into the housing market.
You can see the results reflected clearly in median housing prices, which have soared to record highs in the last 18 months. The median home price in 2021 now dwarfs the “housing bubble” highs of 2007. Also note the brief pandemic recession shaded in gray at the far right of the chart, which coincides perfectly with the beginning of the latest housing boom.
Low interest rates are providing yet another tail wind to the housing market, and mortgage rates have fallen to generational lows. Purchasing and refinancing rates on 30-year fixed mortgages are below 3% today, and 15-year fixed rates are around 2.25%. Mortgage rates are volatile; peaks and troughs are evident on the graph below, but they have generally been falling for the past 40 years.
Incredibly, the 15-year fixed mortgage rate is now below the level of long-term inflation expectations, which have risen toward 2.5% recently. This means that home financing costs are expected to be negative on a real (inflation-adjusted) basis.
For current homeowners, these are good times indeed, and the housing boom has undoubtedly provided a welcome boost to home equity and net worth calculations. But on the flip side, it has probably never been tougher to be a first-time homebuyer in America. Housing supply remains tight, and competition is fierce for quality homes in desirable neighborhoods. However, we also know that market conditions are always changing; in fact, housing inventory appears to have bottomed in January of 2021 and seem to be approaching more ‘normal’ conditions of 3-4 months supply. The pace of home building has also quickened this year, and the increased supply should eventually balance out today’s strong demand.