An Update on Housing

Last week, we received two important reports on home prices: one from the Case-Shiller index and another from the FHFA, the government agency that oversees Fannie Mae and Freddie Mac. Both reports showed an increase in home prices for March, with the Case-Shiller index up 6.5% and the FHFA index up 6.8% over the past year.

What to Expect in the Year Ahead

While I expect home prices to continue rising, the pace will likely slow down compared to the past year. Just like the loose monetary policy in 2020-21 permanently increased the general price level for goods and services, many of the home price gains from that period will also be permanent. However, some regions, like Naples, FL, which saw significant gains due to unique COVID-19 dynamics, might experience some pullback. We’re not in a housing bubble like we were before the financial crisis of 2008-09.

Understanding the Numbers

Since February 2020, the Case-Shiller index has increased by 47.4% and the FHFA index by 50.2%. During the same period, the Consumer Price Index (CPI) rose by 20.4%. Additionally, the price index for constructing new single-family homes went up by 37.9%, outpacing general inflation due to rising commodity and labor costs.

Supply Issues in the Housing Market

One major factor affecting the housing market is the lack of supply. Since the housing bubble burst, homebuilders haven’t been constructing enough homes. From 2009-2015, building fewer homes made sense to clear out excess inventory. But even though this excess supply was absorbed nearly a decade before COVID, builders continued to underbuild.

Regulatory Challenges

It's important to understand that we’re not blaming homebuilders or capitalism. Extensive government regulations at the federal, state, and local levels have made it harder and more expensive to build homes. Environmental rules, zoning restrictions, historical preservation, and the promotion of “smart growth” or “affordable housing” all create obstacles to a free market. Small businesses, including many homebuilders, also face complex and burdensome payroll management, taxes, and regulations, further widening the gap between small and large businesses, especially after COVID.

Construction Delays

The construction process itself is taking longer. Before COVID, the average time from permit to start for single-family homes was 1.1 months; in 2023, it’s 1.5 months. This increase is most notable in the Northeast, where the average time went from 0.9 months pre-COVID to 2.1 months in 2023. For multi-family homes, the time from permit to breaking ground increased from 1.9 months to 2.8 months.

Finishing a home also takes longer now—8.6 months for single-family homes compared to 7.0 months pre-COVID. For multi-family construction, the time increased from 15.4 months to 17.1 months.

Impact on Home Sales

No wonder new home sales remain below their 2019 levels. Existing home sales are also down from 2019, largely due to “mortgage lock-in.” Homeowners who borrowed at very low rates during COVID are now reluctant to move.

Conclusion

In summary, while housing prices may rise more slowly and sales might dip if we see a recession, the overall housing market will likely be more resilient in any downturn than it has been in the past, thanks to the chronic underbuilding of homes. Keep an eye on these trends as they unfold, and consider how they might affect your homebuying or investment decisions.