June 30 fast approaches. This is the day of reckoning many have feared. This is the day that the vast number of Americans who’ve benefited from COVID-19-related government moratoriums of rent and mortgage payments come to a close. And this is a day, I believe, the current insane housing market will start a long correction.
It’s a law of physics that what comes up must come down. Things from hereon out in the housing market will likely decline and stabilize. To parrot Keynes, it will happen slowly…and then all at once.
When the novel coronavirus broke out from Wuhan, China, it eviscerated the world. It was not only a biological crisis. COVID-19 was an economic crisis. It was also, as you’ve read in these pages over the last year, a foreign policy and political crisis.
The pandemic, as my colleague Gregory Copley talks about frequently, was a fear pandemic. That fear led voters to throw out former President Donald J. Trump from office and replace him with Joe Biden. It also created the greatest economic crisis in this country since the Great Depression.
It’s why the moratoriums on rent and mortgage payments were enacted to begin with.
Yet, something strange happened last year. Just when it was assumed the economy was headed for Great Depression 2.0; at the very moment when everyone was predicting a massive collapse in the housing market, the market began to boom.
Fear was the initial driver. People living in crowded cities wanted out. Soon, states like Florida, began ignoring the lockdown protocols the federal government issued, and reopened early during the pandemic. People from states and cities that were still undergoing the most stringent lockdowns began fleeing to the “free” or “open” states of the Sunbelt and the inner West.
Californians left for the inner western states, like Idaho or for Texas. New Yorkers and Chicagoans began flocking down toward Florida and Georgia. Northern Virginians moved en masse to North Carolina. All of this was a response to government policies at individual state or at the federal level.
Meanwhile, not everyone who could have or would have sold under normal conditions did sell their homes. Initially, it was out of fear of transmitting the pandemic to themselves (no one wanted open houses, for example, for obvious reasons).
Then, as the housing market overheated (and it is), many people began worrying that whatever money they made from selling their homes at inflated prices would be eaten away in the hunt for a new home for themselves. So, many people stayed in place who might have otherwise sold and moved.
Then there were the various supply chain shortages that the government response to COVID-19 caused. Today, lumber is at inflated prices. So, too, is steel and other critical components for the construction of new homes. This, on top of the fact that the former Trump Administration had imposed heavy tariffs on lumber products coming from Canada in 2017, which only helped to exacerbate the cost of lumber during the pandemic-turned-housing-frenzy of 2020-21.
The desire on the part of many Americans to flee their little city dwellings in exchange for more expansive suburbs and exurbs in America’s bucolic countryside also meshed in with a trend that some housing experts were warning of going back to 2010: the rise of the Millennial homebuyer.
Long thought to be a mythical creature, the Millennial homebuyer is a very real phenomenon. And, according to trend analyses at the time, the first wave of Millennials would be in their late-thirties and early-forties, many reaching management positions in their jobs wherein they would presumable (finally) have the wealth to realistically put a downpayment on a home, and they would begin doing so by 2020.
Now, you’ve got an overabundance in the demand for a good that, since the dark days of the 2008 Great Recession–housing–has been in short supply. The 2008 collapse occurred largely because homes were easily accessible to many Americans who should not have been given loans to purchase those homes. One of the things that occurred after the collapse in 2008 was to chronically under-build homes. For 12 years, builders did not anticipate the rising tide of demand that was flowing toward them by 2020. The pandemic happened and turned that rising tide of demand in 2020 into a tsunami.
The strain on supply is both artificial and will not last forever. Many analysts (correctly) assume that demand will be higher than it has been in the last decade precisely because of the rise of the Millennial homeowner.
Yet, the current glut of supply will not last.
People will put their homes on the market again in larger numbers, once they believe that the pandemic is over and if they think purchasing a comparable or better home is possible. Already, builders are coming online to build new product. Lumber prices are dropping as well. Meanwhile, the pandemic is coming to an end and life in the United States is returning to normal–somewhat.
Ultimately, more people will want to move or will have to move because of work or family reasons.
Supply is coming back. And this returns us to June 30. The moratoriums will end soon. Many people will find themselves having to abandon their homes, adding much-needed supply to the market. That will ultimately stabilize and likely lower, somewhat, the price of homes for buyers.
By Quarter 4 of this year, we will have some cooling off.
But then the really interesting thing happens: interest rates.
I’ve been hearing from little birdies for the last several months of a brewing conflict inside of the Fed. Those in the Fed are torn between whether or not to raise the interest rates. Fed Chairman Jerome Powell believes that inflation is “transitory” and will thus not require any intervention by the Fed to lower the inflationary threat.
Others, however, disagree.
Fact is, inflation is not transitory. It is hugely problematic and it cannot be allowed to endure. I am predicting that by Quarter 2 of 2022, the Fed will have to eat crow, admit that the inflation threat is real, and then act accordingly by raising interest rates by at least half a percent. That minuscule increase in the rate will effectively cool the housing market as we know it today. And, as supply continues coming on-line, and demand turns down either because people no longer want or can move, the market will correct even more.
By 2023-24, I believe the market will be more affordable and stable than it currently is. Even with all of the talk of the rise of rental suburbs, as various funds seek to purchase single-family homes (e.g. Black Rock) that will keep prices artificially high, the fact is that not enough have gotten into this game (yet) to truly keep prices high.
What we are experiencing with this insane housing market is temporary. Yes, rates are higher than they were in the 2008 crash. Yes, it’s tighter to get a home loan today and requires a higher downpayment than during 2008. But, these factors only account for so much.
Human agency and demand for supply will change the formula in the next few years and market will stabilize; it will correct. The market will become more accessible, I believe, to buyers over time.
Do not listen to the hype. Anything that goes up will come down. It’s a question of how fast and how hard. And, in the long-term, might we be seeing overall deflation? But that, of course, is another matter for another post. In the short-to-medium term, I’d expect a correction over the next year and a half that will likely make the housing market of mayhem less so and more predictable.
As Churchill said, time heals all wounds.