In an earlier blog post, reposted on another blog, I argued that current reporting on the housing market frenzy was intentionally slanted: overly focused on a lack of supply of houses when the real problem was an excess of demand for houses due to a bubble in home prices.
Two commentators gave me pushback. I am thankful to both of them for the thought they put in two responding to me. Both linked to a blog called “Calculated Risk.”
Let me first say that Calculated Risk is a better name than the one for my blog: “Blog.”
Additionally, I am happy to respond to some points made or linked by commenters because one argument presented against my blog post seems to actually strengthen my case. That argument concerns the ratio of home prices to rent prices.
Other arguments I’ve seen on the news a lot and I am glad to get a chance to respond. They are:
that housing supply under certain metrics are low,
that there is a generational explanation to the housing price surge
and that home construction has been weak since the great recession.
I thought I’d respond one-by-one.
Home Price to Home Rent:
One comment links to an article from Calculated Risk which depicts a chart of the ratio of home price to rent cost. I have provided a version of that chart directly below. What is different about my chart is the formatting and that mine includes two new monthly data points. The reason this chart could matter is that, in theory, the value of a house or any other asset could derive from the income it provides to the owner. Because a high ratio indicates that a house is very highly valued relative to the income it provides, that might be a signal of a bubble. I think this chart demonstrates well enough that housing is in a bubble. The Calculated Risk author says we are not in a bubble because the latest data is not as excessive as it was in the peak of the last bubble.
And while I agree that home prices have been more overvalued in the past, I think the chart above proves my point rather well. Home prices cannot continue to grow at a pace implied by the chart above. This discrete growth in the ratio happened at the start of Covid, and I’d argue in response to low interest rates.
Housing Supply Measure:
This article on Calculated Risk which argues low “housing supply” would explain rising home prices. The measure of housing supply used comes from the National Association of Realtors (“NAR”) and quantifies the amount of houses owned by Realtors. I’m sure that measure is predictive of changes in housing prices. The job of a realtor is to buy from sellers and sell to buyers, while charging a markup. If realtors realize that in past weeks or months they’ve done better at selling they might realize they should bid up their asking and bidding prices.
But I don't think a shortage in realtor-owned homes is proof of a supply issue. In my original blog I argued that because home construction was increasing (supply was going up, or at least not going down) the increase in home prices was caused by more buying. I’d argue that the shortage in realtor-owned homes is because of more demand for houses from individuals and households.
When we talk about the quantity of housing supplied we should think in terms of total available houses or total new home construction. The quantity of realtor-owned homes may be predictive of home price movements but it is not telling us the basic mechanism behind why home prices might go up or down.
Week Home Construction After The Great Recession:
Some have argued that housing could be in a shortage because home construction has been weak ever since the Great Recession. What that point leaves out is that home prices have not displayed double digit annual price growth until recently, at least since the Great Recession. Therefore, before the low level of new homes did not create rising prices.
So, what changed? My answer is a home price bubble.
Generational Trends:
Some have argued housing demand is up because Millenials are now buying houses.
In my original blog, I argued that the initial jump in home prices which started this cycle was explainable in part by white flight to the suburbs in response to civil right activism and the possibility of higher municipal taxes, so I am not against analyzing this from a demographic lens.
However, I think that terms like “Millennial” have little weight as it is impossible to draw a meaningful line in the sand between Gen X or Gen Z and Millenials. The Baby Boomers are a distinct generation because of the baby boom, but most generations are arbitrary constructions. Hence, an explanation for rising home prices centered on “the Millennials” deciding to or finally being able to move out to the suburbs all at once lacks credibility in my mind.
Admittedly people of a certain age may be more likely than others to move to the suburbs, but I don’t see a reason to believe the amount of people in that age has suddenly surged. We haven’t had a baby boom since the 40s.