Low Supply, Surprise Demand
The housing supply has been low for more than a decade. The housing crash devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages.1
The pandemic exacerbated labor problems and led to supply-chain issues and high costs for raw materials that held back construction, while demand exploded.2
At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty. The pandemic made it less appealing to have strangers entering a home for an open house. Older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.3 Taken together, these factors produced a perfect storm of low supply and high demand.
Freezing Out First-Time Buyers
Recent inventory gains have been primarily in more expensive houses, and there continues to be a critical shortage of affordable homes. First-time buyers accounted for just 30% of purchases in July 2021.4 A study of 50 cities found that home prices in Q2 were, on average, 5.5 times the local median income of first-time buyers.5
Is This a Bubble?
From 2006 to 2012, the housing market plummeted 60%, taking the broader U.S. economy with it.6 Mortgage requirements were made much stricter after the housing crash, and homeowners today are more likely to afford their homes and to have more equity from larger down payments.7
Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market. There are more single-family homes under construction than at any time since 2007.8
There are inherent risks associated with real estate investments and the real estate industry, each of which could have an adverse effect on the financial performance and value of a real estate investment. Some of these risks include: a deterioration in national, regional, and local economies; tenant defaults; local real estate conditions, such as an oversupply of, or a reduction in demand for, rental space; property mismanagement; changes in operating costs and expenses, including increasing insurance costs, energy prices, real estate taxes, and the costs of compliance with laws, regulations, and government policies. Real estate investments may not be appropriate for all investors. Projections are based on current conditions, are subject to change, and may not come to pass.
1-3)The New York Times, May 14, 2021
4) National Association of Realtors, August 23, 2021
5) The New York Times, August 12, 2021
6) NPR, August 17, 2021
7) The Wall Street Journal, March 15, 2021
8) Bloomberg, August 19, 2021
This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2021 Broadridge Financial Solutions, Inc.