Gerry Broome/AP Photo
A sold sign in a new neighborhood under construction near Mebane, North Carolina, in February. In the last month, unbuilt homes that have been sold but not constructed rose by 16 percent.
The iconic visual image of the housing bubble in the mid-2000s probably comes from the movie The Big Short, when a stripper tells Steve Carell’s character that she has mortgages on five houses and a condo. So far, the iconic moment of the current run-up in prices, which may not exactly be a bubble, is this comment from the CEO of Redfin, a real estate broker, that a homebuyer in Maryland promised along with her bid “a pledge to name her first-born child after the seller.” That wasn’t enough, by the way; the home went to someone else.
The current national level of home prices, adjusted for inflation, sat in March at 4 percent above the peak of the housing bubble that led to the Great Recession; the year-over-year price gain in March was an astronomical 13.2 percent, a number that hasn’t been hit since late 2005. The expectation is that April and May figures will push this up even higher. Stories of desperate home buyers doing whatever it takes to secure a home are proliferating among brokers and experts. Should we be concerned about an unsustainable run-up in prices?
We should be concerned about the housing market for a variety of reasons, but not necessarily for the same ones that resulted in the bubble. Not every trend in the markets leads to “the next financial crisis.” In truth, the tumult of what the pandemic did to housing is unlikely to hit homeowners as much as it will renters. It mirrors the economic recovery from COVID, where the rich have prospered and the poor have struggled.
The previous housing bubble was caused by a surge in demand for mortgages, as loosened underwriting standards and exotic mortgage products gave more people the opportunity to buy a home, including many who couldn’t afford it. Today, we have a problem of supply: there just aren’t enough homes for sale. If no other homes were added to the market, the existing stock for sale in March would have dried up in just two months. That’s a record, and it stands to reason that if you don’t have many homes for sale, prices will shift upward as bidding gets intense.
We should be concerned about the housing market for a variety of reasons, but not necessarily for the same ones that resulted in the bubble.
The reasons for the lack of supply may seem like an artifact of pandemic uncertainty, but the causes go back much further. After the housing bubble burst, home builders grew extremely wary of returning to a business that had imploded so spectacularly. For the first two years after the crisis, housing starts remained below any point in the previous 40 years, and even when they rebounded, as late as the beginning of 2020 they remained at a middling level. At the end of 2020, Freddie Mac estimated a shortage of 3.8 million homes nationwide.
The early months of the pandemic further cratered new home construction, and worse, set expectations for sales of components like lumber artificially low. When home buyers did come back seeking mortgages, there just wasn’t enough lumber to physically build the homes. In the last month, unbuilt homes that have been sold but not constructed rose by 16 percent. With home builders competing with renovators, and supply chains making it hard to even acquire raw materials, this very big near-term snarl is killing new home supply.
Low inventory does a lot of weird things. Many home listings never go public, as brokers “whisper” about them to select customers. And of course, prices are skyrocketing, unmooring from the fundamental value of the properties. Low levels of home construction must be reversed to break this cycle.
But this is not quite like the financial crisis, where borrowers could get caught with an unaffordable home payment. Most of the really bad types of loans, like adjustable-rate mortgages that would spike after a teaser period, have been drummed out of the market. “Dodd-Frank really changed the mortgage market; you don’t have terribly underwritten mortgages,” said Arthur Wilmarth, finance expert and professor emeritus at George Washington University Law School. That means that while people are probably overpaying for mortgages, they have been judged to be able to afford the loans, and with interest rates at historic lows, the loans are cheaper.
Certainly, some borrowers who lost jobs and livelihoods in the pandemic are in some trouble. That said, the Consumer Financial Protection Bureau has proposed to effectively end foreclosure operations until 2022, and there have been substantial forbearance and other relief programs for mortgage borrowers packaged into the various COVID relief laws.
Moreover, the nature of the K-shaped recovery means that different populations are experiencing the pandemic and its aftermath in different ways. Disproportionately richer families—and that would include those who can pass underwriting and get themselves a mortgage—have been largely unaffected by the crisis, and those with stock holdings are likely better off. Poorer families have borne the brunt of the economic pain in the past year, and most of those families are renters.
Lack of rental assistance puts potentially millions of renters at risk of eviction, once the federal moratorium is lifted June 30.
Just as home prices are rising due to low supply, rents are jumping as well. Rental rates increased 1.3 percent year-over-year in April, which doesn’t sound like a lot but it’s the fastest acceleration in a decade. For single-family homes, where the renters likely include a lot of disappointed buyers locked out of the home market, that increase went up to 4.3 percent year-over-year. And for single-family rentals owned in bulk by Wall Street landlords, that acceleration has nearly doubled, to around 7 percent year-over-year.
These renters are seeing higher monthly payments even as many carry past-due balances from the pandemic crisis. Congress has delivered over $50 billion in rental assistance in three bills since March 2020. The only problem is that the money doesn’t seem to be getting to renters, due to exceedingly complicated rules and paperwork demands, as well as a lack of education that the money is available. This Washington Post story on one town in Illinois and the struggles there to get rental assistance out is representative of the problem.
Lack of rental assistance puts potentially millions of renters at risk of eviction, once the federal moratorium is lifted on June 30. But landlords don’t even have to wait that long. The current moratorium from the Centers for Disease Control and Prevention is under legal risk, after multiple federal judges have attempted to strike it down. But landlords have already filed all the required paperwork for 350,000 evictions as of last week in the five states and 28 cities tracked by Princeton University’s Eviction Lab, and are now just waiting for the moratorium to lift. In some states, including Virginia, North Carolina, and Georgia, actual evictions have already begun.
Even if it’s upheld in the courts, the CDC moratorium is not foolproof, as it still allows evictions for anything other than nonpayment of rent, inviting landlords to come up with any excuse to remove tenants. Moreover, June 30 is just a month away, with tenants bracing for removal at that point.
While it’s more fun to talk about crazy home bidding wars, the real losers of this moment are those families without equity. They don’t get all the expansive subsidies reserved for homeownership. They didn’t get an easy way to protect their shelter in pandemic relief. Many didn’t get their jobs back once the economy began to recover. They didn’t get a moratorium that actually managed to work. Nonetheless, they’re seeing accelerating prices just like mortgage buyers. And they’re not likely to get any mercy when open season on tenants begins. Policymakers need to be on red alert for that looming eventuality, and come up with a solution that actually helps renters survive.
