Taking stock: The forces driving the housing market frenzy

Published: Jan 26, 2022

Mynd's quarterly report


By: Tom Brady

The American housing market is facing an epic shortage, with the country some 3.8 million single-family homes shy of demand. This shortage is 52 percent higher than the one Freddie Mac quantified in 2018, the first time it measured the phenomena. 

The buying frenzy has been exacerbated by a flight from urban centers by pandemic-weary apartment dwellers looking for more space, a construction industry that has underbuilt for the past decade, and developers who are coping with lumber prices that have skyrocketed in the last year, and increases in costs of materials like steel, drywall and other building materials. 

The competition for single family homes has forced some investors to take bigger risks — waiving contingencies and making other concessions to sellers — to succeed in the market. For those with smaller portfolios, purchasing a home with a suspect foundation or an undiagnosed insect infestation can be the difference between a nice return on an investment in a rental home and a costly repair that puts a house underwater. Meanwhile, institutional money has flooded the space, and these buyers have the wherewithal to compete on price and volume that is reshaping how homes are bought and sold. The Wall Street Journal reported recently that one in five home buyers in America have no intention of living in the house. 

As prices shoot up in the most desirable cities — Phoenix, Houston, Las Vegas, Charlotte, Sacramento, Boise, Tampa, etc. — areas outside these cities are seeing an influx of new residents, reconfiguring the American landscape. Likewise, developers are looking to build all-purpose for-rent communities in these nearby areas, and so-called satellite cities are springing up. 

Some of these places, and other cities that have not been on the radar for single-family home investors, may offer compelling opportunities for single-family home investors in the coming years.

The American housing market

Shortage of housing pushes up prices

With the demand for single family homes exceeding the supply by nearly four million, the upward pressure on prices shows little sign of easing.

The national median listing price for single-family homes was a record $380,000 in May, up 15.2 percent from last year, and time on the market fell to a low of 39 days. In the previous hot market, two years ago, the median price was $261,500, and it took more than 20 days longer to sell a house, according to the National Association of Realtors.

But May’s numbers revealed that the increase in median sale prices is finally slowing after a year of wild jumps. April’s median sale price was $375,000, which was 17.2 percent higher than the year before. (The median price was $340,000 as recently as December.) Still, inventory is low and the time on market continues to decline.

A number of factors have contributed to this once-in-a-generation housing frenzy, including:

• The drive for more space as people were forced to work from home

• Historically low interest rates

• Investors fleeing the commercial real estate market for the single-family home market

• A millennial generation coming of age and looking to buy their first house

• A chronic shortage of housing because the industry has underbuilt for the last decade

And help is on the way, just not immediately. Covid restrictions hit home construction sites as hard as it did other sectors of the economy, and labor is in short supply. Lumber prices surged to about four times higher than they were a year ago in early May before falling about 40 percent. Builders also faced shortages of other materials needed to outfit a home, like steel, electrical supplies, insulation, PVC piping, drywall, and even appliances, builders will be unable to catch up with demand for some time.

But the construction business is booming. “It’s a good time to be a builder,” said Don Ganguly, SVP at Mynd Investor Services. 

Some builders appear to be a bit hesitant, though, as housing starts fell 9.5% to a seasonally adjusted annual rate of 1.569 million units in April after March posted a rate of 1.733 million units, the highest level since June 2006. Experts suspect some developers are waiting for the costs of materials to moderate before submitting projects. The industry has been responding to demand in the last 18 months; single-family housing starts for all of 2020 totaled 991,000, up 11.7 percent compared to the previous year.

Shortages hamper the construction industry

But it will be a while before builders can catch up, and the struggles created by a lack of materials and higher costs has frustrated many in the construction industry.

“I’ve never seen anything quite like this,” Brant Chesson, the president and CEO of Homes By Dickerson, a North Carolina based home builder, told CNN recently. His company would like to build more homes but can’t get the labor, lumber, and other supplies it needs to do so. “It’s absolutely contributing to a shortage of housing.”

Other obstacles slowing the process are disruptions in the rail and truck shipping networks. “Due to container and trucking shortages being felt across the country, anything with significant shipping and logistics components can cause lead time issues,” Josh Lawrence, vice president of preconstruction and chief estimator at McCarthy Building Cos., St. Louis, told Engineering News-Record in late March.

The lumber shortage can be traced to the cutback on production at sawmills; other manufacturers of building materials reduced capacity at the beginning of the pandemic as well, expecting demand to slacken.

Instead, demand never fell off and the recent surge has put producers even further behind.

In addition, lumber tariffs of up to 24 percent on Canadian timber instituted by the Trump administration in 2017 slowed the parade of lumber trucks from north of the border. The Commerce Department reduced tariffs to nine percent in December in an effort to goose supply, but it recently proposed doubling those to 18 percent to combat what it calls unfair Canadian labor practices.

Lumber prices have pushed the price of an average new single-family home almost $36,000 higher according to the National Association of Home Builders. Lumber prices have been falling after hitting a high in early May, but most experts say it will be six months or more before they return to more normal levels. Developers so far have been able to pass off the higher material costs to buyers, but there will come a point where affordability will push prospective buyers to the sidelines.

We need more homes. That will take a while.

The other domino is that housing in America has been chronically under built for the last decade, a hangover from the last housing bust in the mid- to late- 2000s. California, a state with tight building regulations and residents with a well-developed Nimby complex, offers an extreme example of this problem. Its housing shortage dates back to about 1970, and by 2018 California ranked 49th in the United States in housing units per resident. 

The upshot is that housing prices continue to defy gravity in California, as the median price hit $813,980 in April, up 7.2% from March and 34% from a year earlier, when pandemic lockdowns mostly froze the housing market, according to data released in May by the California Association of Realtors. The median time on the market in April was a ridiculously low seven days, a day shorter than March sales. And even though more people left California last year than moved in for the first time since 1900, regulatory challenges that often stymie builders dictate short supply for the foreseeable future.

If the barriers to building were removed, according to David Zanaty, chief real estate officer at Mynd, the supply side issue could be rectified. 

“Market forces are capable of resolving this problem,” Zanaty said. “You see the influx of capital and talent into this space, but they do not control the regulatory environment. They need the cooperation of counties and states.”

If the friction inserted into the building process by state and federal agencies were lessened, the demand could be met more quickly. “Production tensions and political tension are going to shape the market,” Zanaty added.

There is another glimmer of hope on the supply side in this paradigm, according to a recent survey by realtor.com. Of 4,000 people surveyed, about 10 percent of current homeowners planned to sell their homes this year, with more than half of those being affordably priced. This is about 25 percent more than the annual average, and this increase means about 1.5 million more homes on the market. Some 16 percent said they expected to sell within the next two to three years.

So the predictions of double-digit percentage gains for the next two years are likely to come true. But if affordability starts to push more people out of the market, and interest rates float up to more normal levels, the supply of homes could catch up with the demand and some balance between buyers and sellers could re-emerge.

Goodbye commute, hello satellite cities.

For many Americans, the five-day-a-week commute into crowded city centers on trains and buses or via traffic-choked highways is as anachronistic as a company-funded pension. This shift will be a boon for smaller cities and suburbs across America.

Some younger people have moved in with their parents during the pandemic and found new opportunities in their old hometowns. Some older workers had been planning to move out of the cities, or a close-in suburb, and the pandemic accelerated their retreat. 

In February the Bay Area-based Salesforce announced a “Work From Anywhere” policy and estimated that 65 percent of its 9,000 locally based employees would take advantage of its new system. Twitter CEO Jack Dorsey announced a year ago that his employees could work from anywhere. 

But others are calling their employees back to the office. New York City’s 80,000 municipal employees started returning to the office in shifts on May 3, and Mayor Bill de Blasio has set a goal of fully reopening city offices July 1. J.P. Morgan chief Jamie Dimon announced in early May that he was officially sick of Zoom meetings and has said he wants 50 percent of his bankers rotating through offices by July, and the office more or less back to normal by the fall.

“This pandemic was a rapid experiment in people’s relationship to work,” says Daniel Bornstein, a real estate attorney in San Francisco, adding that the places that stand to benefit the most are those second-tier cities with cheaper housing markets. “People don’t need to be in a central location to work.”

In search of cheaper housing, and more space

Housing affordability and available inventory are two factors driving the migration from cities, according to Ganguly. When working remotely, or commuting two or three days a week, people realized, “I can go to a place that is more affordable,” he added. “I don’t think that’s going to change any time soon.” San Franciscans have moved east to Livermore and Tracy, just as others have left Los Angeles for Riverside and Corona, making those cities population centers in themselves.

“If you continue to expand out, you’ll see satellites to main cities,” Ganguly said. “It’s just a matter of time. It’s a playbook that is well-established.”

Despite talk of a massive, pandemic-inspired migration out of cities, change of address and mail forwarding data from the U.S. Postal Service showed that most people who moved stayed close to where they came from. And Census figures show that the migration out of urban counties has been going on for about a decade, though in 2020 urban counties shrank at a faster rate than small towns and rural counties.

Dennis Bron, vice president for growth at Mynd, believes there is a good possibility that some of the migration from cities will be reversed as vaccination rates increase and companies call for their workers to return to the office.

In New York City, where he lives, some bigger landlords who are waiting for renters to flow back into town have been sitting on apartments rather than putting them on the market at lower rents. While tech companies have not signed any leases in San Francisco, Facebook, Google and Amazon have all staked claims to large office space in New York.

“The smart money is that a lot of these people are returning,” Bron said. 

Since there might be a “little reversal” in migration to some markets, Bron said, prices could moderate and “offer people an opportunity to invest.”

Gas prices, rising with cutbacks in oil production, could affect the migration as well since longer commutes will become less affordable. But today’s move to the exurbs is far different from back in 2005, when less affluent workers moved to areas where they could afford a home. These days, Bron pointed out, “It’s a different demographic moving out. These are office workers who are not as vulnerable to a rise in oil prices.”

Tech jobs spread to other parts of the country

Ganguly said if tech jobs are distributed to other cities and states, it is a benefit to the country. “When secondary or tertiary cities attract that population,” he said, “you get a little of that tech magic.”

If tech workers can do their jobs in lower priced areas and find their desired quality of life, the race is on. When these hi-tech jobs move to so-called second-tier cities, opportunities open up for local entrepreneurs like restaurateurs and others, to serve them. “If there is some critical mass of people going into these cities, some local company can tap into that,” he said.

The impact of all this movement on the housing market could be significant. 

Smaller cities are offering bonuses to lure tech workers looking at a future of remote work, the New York Times reported recently. The Northwest Arkansas Council, which includes the cities of Fayetteville and Bentonville, is offering $10,000 and a free bicycle to explore the region’s 322 miles of biking trails if workers relocate there for at least a year. The council is investing $1 million over six months, and has received tens of thousands of applications.

Other cities have also offered incentive programs: Savannah, Ga., said it would award $2,000 to selected tech workers who promise to stay two years; Tulsa Remote, a program that offers people $10,000 to move to that city for a year, started in the fall of 2018, and has seen demand increase during the pandemic.

While the hottest real estate markets — places like Phoenix, Las Vegas, Austin, Boise, Houston, Sacramento, and Charlotte — stayed hot due to outflow from coastal cities like New York and San Francisco, other smaller cities saw more people migrate there between 2019 and 2020, including Kingston, N.Y.; Heber, Utah; Sarasota, Fla.; Pittsfield, Mass; and Aberdeen, Wash. Most are within a two-hour drive of a major metro area.

Though there has not been a radical reshuffling of population trends — the Sunbelt and the Southwest are still beneficiaries of a longtime migration — there is a sense that skilled workers could be more evenly distributed across America over the next few years.

“These other cities are trying to build some critical mass of a tech workforce,” said Ganguly. If they are successful, he added, “In the long haul this becomes better for our country. If, for example, these traditional Rust Belt cities can revive, it lifts all boats.”

The buyer’s guide to hypercompetitive markets

For prospective home buyers and investors, anecdotes about lines for open houses stretching around the block and cash offers over the asking price are the stuff of nightmares. The chances of landing a deal feel more remote by the day.

But if a potential buyer is prepared and has done the research, the chances increase of finding a property that can deliver cash flow and appreciate over time.

“The way to get ahead is to really have the best data,” said Ale Ayestarán, chief business officer at Mynd. “You have to really look at what a property is worth and set aside your emotions.”

The tools that Mynd provides can help investors manage a market that seems out of control. 

Once an investor decides to buy, there are ways to stand out from the crowd and still protect his ability to earn a decent return.

Waiving contingencies is one way, and offering a seller flexible terms is another. But buyers still need to be cautious about what contingencies they are willing to forgo, as there are many cases when accepting “as is” can lead to a serious case of buyer’s remorse. A house with water damage, a structurally unsound foundation, an insect infestation or an outdated electrical system may cost tens of thousands of dollars to fix, and can turn an investment property into a money pit.

“One thing not being talked about is the shift in risk from seller to buyer,” said Zanaty, Mynd’s chief real estate officer. “There has been a qualitative change in the controls in place.”

Most experts recommend that investors not waive the home inspection, since a qualified professional will be able to quantify the problems with a property and make recommendations for repairs.

Dylan Jones and his wife were relocating from California. They bought a 1,100-square-foot home in Essex, Conn., at the end of September despite a heated seller’s market there and some qualms about the commitment.

"One thing not being talked about is the shift in risk from seller to buyers…"

He knew the home needed work, he told the New York Times, including a new septic tank and furnace, and framing work. But it bothered him more than he thought it would.

“The peak of my buyer’s remorse was when the structural engineer came in and told us we would have to redo the basement to make sure it is structurally sound,” Mr. Jones, a physician’s assistant, told the Times. (A different engineer recommended more modest repairs.)

Here are a few steps investors can take to compete in today’s hypercompetitive buyer’s market:

Get pre-approved for a mortgage. If possible, pay cash and then do a cash-out refinance to preserve capital.

If that’s not possible, Ayestarán recommends pushing up the down payment to 30 or 40 percent to make an offer more attractive.

With home offices at a premium, Ayestarán also recommends the investor look at larger homes to allow for office space.

Educate yourself on the market. If a property is likely to be sold for more than the asking price, an offer below asking will eliminate you from the bidding.

Be flexible on when sellers need to move out. If the seller can rent the house from the buyer while looking for a new property, they will look more favorably on an offer.

Waive some contingencies. If a property needs repairs, factor those into the budget and if the financials no longer work, be willing to walk away.

Be prepared to raise your bid, and think of adding an escalation clause, say of 2-3 percent over the highest bid. Also establish a limit of what you will spend.

Assess your acceptable risk level. If a deal is pushing you outside your comfort zone, sometimes it’s best to walk away and keep looking.

Online tools offer an edge, but be wary

Another factor driving the competition is the availability of online tools that have made it easier than ever for investors to purchase a property unseen.

Remote shoppers can get a fuller picture of a home than ever before from a computer screen through tools like:

• Virtual house tours

• 3-D renderings of home interiors

• Local crime statistics that are searchable and mappable online

• Home price comparisons in the area from sites like Zillow and Redfin

• Online rankings of schools served by a neighborhood

• Google Street View, which allows a prospective investor to look over neighboring properties.

Redfin reported that 63 percent of buyers who used it in November and December made an offer on a home they had not seen in person, a 500 percent increase since February 2020, the month before the Covid-19 pandemic hit.

Sometimes online buyers never have a chance to visit a property in person, even for a final walk-through. Most experts recommend not skipping this step, as this is the investor’s final opportunity to avoid what could be an expensive mistake. If you cannot make the final walk-through, find a recommended professional to do it.

So if all this makes you worry about a housing market headed for an unpleasant resolution, even if not as severe as the 2008 crash, it’s time to remember that old nugget: caveat emptor (Latin for buyer beware).

Zanaty says some investors who make questionable decisions about what house to buy may be bailed out when the homes appreciate in value. But there is no guarantee that home prices will continue to rise, especially if there is a spike in interest rates. Also, if builders ramp up production and more sellers decide to cash in on a hot market, supply will increase and prices will soften.

“The market is forcing them to make imprudent decisions,” said Zanaty of some overanxious investors. “If you want to mitigate risk and still be competitive in the marketplace, Mynd can help you do that.”

The cool down trifecta: Pricing, wages, inflation

With many Americans entrenched in their working-from-home routines, the desire for larger living spaces and a yard for children to play in, or to entertain friends in, appears to be here to stay. The result has been the frothiest housing market in a generation, and most experts expect a double-digit-percentage increase in home prices this year and a more modest hike in 2022.

But few observers predicted the meltdown in the housing market that started late in 2006 and eventually led to the Great Recession of 2008, even though there were signs that the fundamentals feeding the runup were shaky. And when a new coronavirus was identified in China in late 2019, and most American workers were ordered to work from home a few months later, not many predicted that the next 18 months would be a live sociological experiment in remote video calls with colleagues and extended periods of family togetherness. So who can predict what will happen with the American housing market in the next two years, or even the next six months?

That said, a number of factors could lead to the cooling of the home-buying frenzy:

• Wages fail to keep up with the increases in home prices, impacting affordability.

• Interest rates creep up.

• Builders start to catch up on the supply side.

• Those who fled to the suburbs decide they miss city living, and return to urban centers.

• More homeowners decide to sell and cash in on the frenzy.

If home prices keep rising — median sales listings hit $380,000 in May — affordability could become an issue. But rental prices for single-family homes are going up as well, though at a much more modest rate — about 4 percent — than the previous February (as opposed to 17 percent for home prices), according to data from CoreLogic. But if more folks turn to home rentals in order to have more space, competition could heat up that market as well.

Zanaty believes there is a supply imbalance in the market, with many who are relegated to three-bedroom apartments who would prefer to be living in a single-family home with a yard. Subdivisions full of rental homes are popping up to fill that need.

“We’ve spent a fair amount of time building the wrong stuff,” he said. “There is a mismatch of the available housing to consumers and a suboptimal supply. Build-to-rent is solving that problem, and doing it with institutional quality management.”

Lagging wages could slow market surge

The crux of the problem is that the purchasing power of most Americans has lagged the overall economy. According to most analysts, real wages peaked around 1973 for most American workers and pay has mostly stagnated for all but the top tier since then.

“Wages are not going up as quickly as rising housing prices and rising rents,” said Nani Srinivasan, head of investment data science at Mynd. “That’s a problem.” But recent reports indicate that employers are competing for workers, which could feed wage growth.

With pay stagnant for many workers over the last couple of decades, the dream of home ownership is out of reach for many. This is a boon to the single-family rental home market, and one of the reasons Mynd encourages its clients, and prospective clients, to look for opportunities to invest.

“Thirty percent of wages are set aside to pay the rent or the mortgage,” Srinivasan said. “That’s a ratio that has got to be maintained.”

With so much institutional money — pension funds and money coming from venture capitalists and commercial real estate investors, etc. — now flooding the space for single-family homes, the retail investor has new competition, and these competitors have deep pockets.

They have the wherewithal to lower rents if the market softens, and if rents lowered across the board in the next two years, investors in the single-family market who bought at the peak could see their profit margins squeezed. Both retail and institutional investors expect to see some

appreciation in home prices in the coming years, but there is no law that says prices have to keep rising.

As inflation looms, will rock-bottom rates last?

The other wild card that plays heavily in home prices is interest rates, which have been historically low for the last few years. With the most recent report from the Labor Department showing that inflation increased in May to 5 percent, it now seems that sub-three-percent mortgage rates may be a thing of the past. (After hitting a low of 2.799 percent on May 10, rates on a 30-year mortgage have been hovering around three percent.) If inflation is persistently higher in the coming months, the Fed may be forced to let rates float higher sooner than it wanted to. 

Investing in properties is viewed as a hedge against inflation. But owners who were counting on appreciation to make their investment pay off could be disappointed if higher rates soften demand and home prices descend from the stratosphere. And if inflation creeps above 4 percent, the profit margin for single-family home investors who expect to pull five or six percent annually in cash flow will be squeezed.

Ultimately, nobody has a crystal ball on where the housing market will be in the next three years, but experts at Mynd can offer advice on where to invest and how to best manage a portfolio of rental properties.

What happens when the aid spigot runs dry?

As negotiations in Washington drag on over President Joe Biden’s $1 trillion infrastructure plan, the trillions in pandemic relief funds already approved are starting to filter into the economy.

Those funds include some $46.5 billion in rent relief, aimed at landlords and tenants who have fallen behind. President Biden’s infrastructure plan may not be ending up as large as he wants, but there is no question the final form will inject more cash into an economy bouncing back from the depths of the Covid-19 crisis.

“The infrastructure plan is going to put more people to work,” said Ganguly of Mynd. And when people are working, they have money to spend on their rent, and to buy items to power America’s consumer-driven economy.

The mood in the corporate sector is also brightening, according to Ayestarán, Mynd’s chief business officer. 

“The economy is recovering,” Ayestarán said. “Companies are starting to feel good about starting projects and hiring people. The stimulus helps consumption.”

Billions in relief for landlords and tenants

The Biden Administration is taking additional steps to shore up the housing market, where tenants in arrears and landlords behind on mortgages are a threat to stability.

On May 7, it released guidelines detailing efforts to prevent evictions and provide emergency assistance to renters. The program is also aimed at assisting small time landlords who are behind on their mortgages because of disruptions in rental payments. The report says that nearly 7 million Americans said they were behind on rent in the second half of April, and more than 40 percent of those renters worry that they could be evicted sometime in the next two months.

The first phase of the Emergency Rental Assistance plan (ERA 1) set aside $25 billion and was included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and the nearly $900 billion stimulus passed in December 2020. Applications for assistance under the plan initially had to be initiated by landlords. While states decide how the money is distributed, landlords affected by the pandemic could request assistance on behalf of their tenants. To access funds for tenants who are unable to pay, landlords needed to:

• Get the tenant’s signature on the application (electronic signatures are acceptable)

• Share all correspondence and paperwork with tenants

• Use the funds for current rent or back rent.

One of the key changes in the $21.6 billion ERA 2, part of the $1.9 trillion American Rescue Plan Act of 2021 signed by President Biden in March, is that tenants can initiate the application process.

The application for assistance under ERA 2 reduced the waiting time for tenants, eased

some application requirements and called for greater protections against evictions. It also will cover some expenses related to finding new housing for some tenants, including moving expenses, security deposits, future rent, utilities, and the cost of a transitional stay in a hotel or motel.

Some tenants who were behind on their rent may have been able to pay some back rent with their $1,400 stimulus payments, but there are a few unscrupulous tenants who have used the crisis as an excuse to avoid rent payments altogether, though they may not qualify under the CDC guidelines for rent relief.

The return of normal employment and consumption levels should stabilize the rental housing market, but the economic recovery so far has been uneven. The May and April unemployment reports showed the economy producing 559,000 and 266,000 jobs respectively, compared with 770,000 in March. Some Republicans argued that the extra $300 a week in federal benefits is keeping some workers on the sidelines, but there is little data to support that and most economists argue that the damage wrought on the economy by the pandemic will take some time to repair.

And it will take time to get the money to the landlords and tenants who need it, because most of it is disbursed at the local level and many cities and counties did not have the infrastructure set up to pay out the funds.

What will the new normal look like?

Many economists believe that once the federal stimulus money is distributed, dormant industries like travel and hospitality rebound, and consumer spending approaches the two-thirds of economic activity it usually represents, life will return to a semblance of normal.

“This cash is helping people stay afloat,” said Ganguly. “If these folks don’t find productive employment by the time the spigot is turned off it would affect the rental market in the form of delinquencies and foreclosures for homeowners.”

Ganguly, for one, does not expect that to happen. “So far the bet is that the growing economy will absorb them,” he said.

Another aspect of the ERA 2 program that will help distressed tenants and landlords is better access to emergency resources. The guidelines call for the U.S. Treasury Department to provide an online hub of links to local emergency rental assistance programs to make it easier for renters and landlords to find programs in their area.

Yet one more unpredictable factor in the housing market is the fate of foreclosure and eviction moratoriums. The threat of eviction is the most powerful tool landlords have to compel tenants to pay back rent, and the suspension of evictions has upended the industry.

A federal judge in Washington, D.C., ruled in early May that the Centers for Disease Control and Prevention overstepped its authority with its nationwide eviction moratorium, which was set to expire June 30. But like much of housing policy, and the emergency funds that are earmarked to tenants and landlords, eviction moratoriums are mostly handled at the local level, so the reality is that geography will largely determine what tenants face being kicked out of their homes.

Survey says: No bubble

Talk of a bubble in the real estate market has been, well, bubbling up. With the median home price at a record $375,000 in the U. S. and homes being snapped up like Chia pets in the late 1970s, the market is clearly controlled by sellers

A lack of inventory has spurred bidding wars in previously sleepy real estate markets such as Coeur D’Alene, Idaho and Bend, Ore. Desperate buyers are making videos and sending “love letters” to sellers in an effort to stand out from the pack.

So with headlines about soaring sale prices in the “10 Hottest Real Estate Markets” in the country part of the daily drumbeat from sites like Zillow, Streeteasy, and Realtor.com, we can ask the question: Is the housing market in a bubble? Aside from the oft-mentioned stronger lending standards now in place, which are a marked difference from the 2008 crash, the housing market is some 3.8 million units short of demand, and it will take time for builders to catch up. This shortage was also fueled by an industry that underbuilt and a millennial generation looking to purchase first homes.

Prices are expected to increase somewhere in the neighborhood of 12 percent this year, and about 6 percent in 2022. More modest increases, in line with historical averages, are forecast after that.

“The end of 2023 is when we think we will reach equilibrium,” said Srinivasan, the data scientist at Mynd. “Prices will continue to rise, but the affordability factor will come into play.”

The time to invest in single family homes? Now

Ayestarán, Mynd’s chief business officer, is bullish on the housing market.

“This is an asset class investors should gravitate to,” he said, “particularly in times of upheaval.”

“It’s an asset class that is resilient and stable,” he added. “If you have a limited portfolio, invest more. If you are thinking about it, it’s time to invest.”

The run on home purchases is pushing price growth to levels that are unsustainable for the long term. Part of this is being fueled by commercial and retail investors that are reallocating their money to single-family homes and other residential real estate, two asset classes that were hammered during the Covid-19 pandemic. These investors will be quick to move their money out if commercial real estate starts to recover, or returns on single-family homes lag.

Since it appears unlikely that demand is going to drop off any time soon, John Burns, of the national real estate consulting firm named after him, says that the U.S. may be entering a period in which housing is “permanently more expensive.”

If there is a lull in the frenzy, and inventory does start to catch up with demand, institutional investors in the single-family home rental market — of which there are hundreds now — have an advantage over retail investors, according to Srinivasan. They have the financial wherewithal to absorb lower returns because of economies of scale.

A crash is unlikely; a correction is possible

Bron notes that affordability data from the National Association of Realtors show that homes were more expensive at the outset of the pandemic than they are now. The rise in prices has been offset by low interest rates and higher wages. Even if interest rates rise to 4 percent in the next year or so, “that does not affect affordability that much,” Bron said.

One wild card, Bron said, is if rates shoot up quickly in reaction to inflationary pressures, which has happened before. Another factor that could increase supply, and bring down prices, is if more Baby Boomers decide to downsize and cash in on high home prices. But in reality, Bron said, “it’s hard to have a housing market crash when the economy is strong.”

Srinivasan does not see a crash in home prices like what the country experienced in 2008 because the system is not loaded down with flawed buyers, and most banks have tightened up their lending practices. “All the fundamentals are pretty strong,” he said. But there are some structural imbalances between wages and sale prices that could augur trouble ahead.

“If the wage situation does not improve, a correction is possible,” said Srinivasan, saying a drop in rents and home prices of about ten percent is possible, though not likely.

Zanaty thinks there will be pockets where housing is overbuilt that could see a correction in the next couple of years, and then some equilibrium between supply and demand down the road.

“There will be an oversupply in three or four years, and sooner in some markets,” said Zanaty. “I don’t see a macroeconomic correction in the U.S. market any time soon.”

What’s more likely in the near term is that there will be many headlines asking, “Is the Housing Market in a Bubble?” because, well, according to Google searches, that’s what people want to know.

What investors should be looking at is the data, and the data provided by the experts at Mynd will help investors make smart decisions in a noisy market.

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* For qualified investors with a minimum of $50,000 available to invest

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Mynd recommends saving a minimum of $50,000 to cover a 30% down payment and closing costs.

In the meantime, learn more about ways to start with a smaller downpayment here.

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