In the midst of a raging pandemic, with millions of Americans still out of work and facing the possibility of eviction and foreclosure, the United States is experiencing a real estate boom the likes of which it hasn't seen in 15 years.
Home prices are rising practically everywhere. From Augusta, Maine, to Phoenix, Arizona, and from Sarasota, Florida, to Aberdeen, Washington, prices are up by double digits.
Driven by historically low interest rates that make borrowing cheap and waves of people fleeing densely populated cities because of COVID-19, home buying has become as competitive as it was during the boom years of the mid-2000s.
Homes for sale have dwindled
Supplies of existing dwellings have dwindled far below the six-month level considered normal. Realtors are receiving multiple offers. Builders can't keep up with demand and flipping is back.
Talk of a housing bubble is now common among analysts – including those at Swiss banking giant UBS, who back up their claims with charts showing how home prices are outstripping both wages and rents. While home prices have appreciated more than 60% since November 2012, incomes have only appreciated by 20% and rents by 30% over the same time period. The upshot: Homes are out of reach for more and more buyers every year, the analysts argue.
But unlike the real estate boom that led to the Great Recession, this nationwide price spike is not being fueled by a wholesale collapse in lender ethics. There aren't any low-doc or no-doc loans to be had and borrowers are having to do much more than fog a mirror to get funding.
Supply and demand fundamentals can also fuel rising prices.
"For over a decade, we've had a chronic lack of supply of housing," said Marco Santarelli, chief executive of Norada Real Estate Investments in Laguna Niguel, Calif. "We need 1.62 million units a year to keep pace with organic demand, but we produce significantly less. We're about 370,000 units short each year."
Santarelli added that the supply imbalance will only get worse as more than 140 million millennials and members of Gen Z move into rental units and starter homes in the years ahead.
"About 52% of young adults from 18 to 29 are still living with their parents," Santarelli said. "That's the highest rate in over 110 years. These people have to go somewhere and that's why I'm so bullish about real estate over the long term.".
An out-of-balance housing market
But these healthy fundamentals don't mean there aren't worrying distortions in the market.
With the Federal Reserve continuing to buy Treasury bonds and other securities under its quantitative easing program, interest rates are being held artificially low as dollars are being pumped into the economy. That makes borrowing cheap and encourages investors to buy riskier assets like stocks and real estate, driving prices of those assets ever higher.
Until the Federal Reserve halts its bond buying and interest rates begin to rise again, real estate prices will continue to climb, says Robert Goldman, a real estate agent with Michael Saunders & Co. in Sarasota. And no change in policy is expected any time soon.
"The Fed will keep buying bonds far into the future despite what could be a booming economy in 2021 and 2022," Goldman said in his monthly newsletter.
"We had a 10.2% increase in home prices in Sarasota in 2020," Goldman told USA TODAY. "What I'm concerned about is that prices will continue to appreciate at 10% to 15% a year and that's not sustainable."
At a certain point, interest rates will rise and there won't be enough buyers coming in from more expensive markets to keep paying the higher prices. Either development, or both, could lead to a pullback in prices.
The moratoriums on evictions and foreclosures are also distorting the market. There's no question these policies are needed to keep people from being displaced in the midst of a pandemic, but they will eventually have to be lifted and it is not clear what will happen when they do.
Santarelli is confident the damage will be minimal. He believes renters will find jobs when the economy rebounds and they will not join the legions of homeless. He also believes homeowners will either be able to sell their houses and condos and walk away with equity, or refinance or modify and tack whatever they owe to the back end of their mortgages.
"We saw people's equity grow 11% last year and it's expected to grow another 6% this year," Santarelli said. "So the appreciation is in their favor. They can sell or refinance and banks are well off either way."
If homeowners can't sell or refinance, there could be a spike in foreclosures and the supply of homes on the market would increase sharply, pushing down prices.
Rental market is humming
Meanwhile, the segment of the real estate market that seems to be working most efficiently at the moment is the rental market. As people leave densely populated cities to escape Covid and congestion, rents are dropping. In San Francisco, rents fell 24% in 2020, according to Zumper.com, which tracks rents across the country. They were down nearly 20% in New York and 17% in Boston.
In cities like Newark, N.J., Sacramento, Calif. and Richmond, Va., where people are relocating, rents are moving sharply in the opposite direction.
"The top eight cities in the nation, which were very hot and very millennial heavy, have seen enormous declines in rent, while secondary cities in the same regions have benefited," said Anthemos Georgiades, co-founder and chief executive of Zumper.com.
Median home prices in cities experiencing major out-migration, however, have not fallen – at least not yet. New York, for instance, saw rents drop by 20%, but its median home prices rose 6%. The same trend holds true in San Francisco, Boston, Los Angeles and Washington, D.C.
Georgiades says that's because the rental market is much more dynamic than the "for sale" market.
"Rent prices adjust super quickly to the realities of the market," Georgiades said. "If I get a vacancy in April, the clock is ticking. I've got a depreciating asset. I'm going to drop my price fast to get someone in there."
Homeowners looking to sell their properties are willing to be more patient, he said. So prices don't adjust as quickly.
According to Norada Real Estate Investments, San Francisco's infamously hot real estate market has cooled of late. But inventories of unsold homes are still tight and that's why prices aren't declining. The reality in New York is different. Norada is reporting that there are now more homes on the market in the city than there are buyers who want them, which puts buyers in the driver's seat when it comes to downward price negotiations.
It's cities like this that should see prices decline first, according to prominent Yale economist Robert Shiller, and he advised homebuyers in a New York Times column "to avoid investing in too expensive of a house or in taking on too much risk."
Home prices gone wild
For Mark Stapp, a real estate professor at Arizona State University, what's going on in the real estate market right now is not a bubble.
"The definition of a bubble is that when it pops, there's nothing there," Stapp said. "That's not this case. There's very real demand that exists and that's what's causing prices to increase."
Realtors across the country generally agree.
Mary Jo Santistevan, a top producing sales associate with Berkshire Hathaway HomeServices in Phoenix, said buyers are flowing in from congested cities of California, Washington State and the Midwest. They are looking to take advantage of Arizona’s lower home prices, lower property taxes and quality of life. But they are confronting a situation where inventories of unsold homes have been dropping steadily in recent years and are now teetering on a one-month supply in some areas and less than that in others.
“Even builders are struggling to keep up with demand,” Santistevan said. “There’s a 10-month wait time for construction. The majority of builders are using a lottery system. One builder in particular in Gilbert had a waitlist of 100 deep."
Stacie Lee, a fellow agent at Berkshire Hathaway, says whenever something goes on the market in Phoenix, the showings are usually back-to-back and a closing comes within a matter of days.
“Many homes go for $30,000 to $40,000 over list price and a few homes in the mid $300,000s have sold for $100,000 over list,” Lee said. “A lot are going for cash. Cash is king right now.”
Lee added that she had 70 people show up for an open house over the summer and had 15 offers in the first couple of hours. The home sold for $375,000 and is now back on the market at $550,000.
“There’s a lot of investors flipping homes here,” she said.
Nearly 3,000 miles away in Augusta, Maine, the housing market is just as frothy.
Fifteen of Maine’s 16 counties experienced a 10% increase in median home prices in 2020, according to Aaron Bolster, president of the Maine Association of Realtors. Some of those counties saw leaps of 20% or more.
“We already knew Maine was popular," Bolster said. “More than 32 million people visit between Memorial Day and Labor Day. They don’t typically come at this time of year. But in a pandemic, it’s a safe place to be. The population density is very low and teleworking suddenly got popular in 2020.”
Bolster said 25% of buyers in 2019 came from out of state. Last year, that number rose to 33%. Without a large housing stock to begin with, available listings got siphoned off pretty quickly as out of state buyers bid up the prices.
At the moment, there are only 6,000 homes for sale in the entire state, Bolster said, and half of them are under contract.
The situation is unique for Maine and Bolster is not sure how long it will last, especially given that the demand is driven by people coming from out of state – many of whom will presumably be able to work from home – and not by job creation within Maine's borders.
“Maine doesn’t create a lot of new jobs,” Bolster said. “When we create a new job, we give one up. So real estate doesn't usually appreciate that fast. It’s interesting to see such a robust market when it’s not really tied to economics.”
GRAPHICS Janet Loehrke, George Petras, USA TODAY