“I can’t do this anymore…” she sighed after signing off of her work Zoom call in a closet.
Like so many, Caroline Wells and her family were holed up at home during the pandemic. The family of four were rubbing elbows in their small condo on a busy San Antonio street—now doubling as an office and pre-school.
But four months in, Caroline couldn’t keep hiding in closets from her kids’ babbling. So the family went shopping for a more spacious place outside the city. That’s when they came up against bidding wars.
Have you seen how people are fighting over listings these days? They are out-bidding each other for $500K houses during Facebook Live videos:
Or going for 20%+ above asking price
This is nuts. No wonder U.S. home prices have soared more than in any previous three-month period leading up to the 2008 crash (TheEconomist). Meanwhile, sales are quickly marching to pre-2008 levels, as you can see below:
But this housing boom is due to much more than people’s inability to “co-work” with their spouses and kids. It has to do with a simple threshold, about which I’ll tell you in a moment.
But first, why does everybody want to buy a house during a recession?
There are a couple of reasons so many people are suddenly house shopping.
First and most obvious, many are fed up with living and working out of small apartments in expensive ghost cities. And with new remote work policies in place, most people no longer have to. So they are packing up and fleeing in droves to suburbs and cheaper cities.
Then, the 30-year mortgage rate has sunk from 3.7% to 2.9%. This is the lowest rate on record, which makes most houses more affordable despite record housing prices.
In other words, there’s never been a better time to relocate, and people are taking advantage. The problem is that you can’t buy a house that isn’t for sale.
This is the greatest housing shortage in America’s modern history
Let me show you the most important chart in the housing market right now.
It plots the inventory of houses in the U.S. all the way back to 1963. The number tells how many months it would take sell all the listings if no new houses were built:
As you can see, America is now facing its greatest housing shortage in modern history. You could sell all the houses in just under two months. That’s 6X quicker than at the height of the 2008 housing boom.
Lawrence Yun, chief economist of the National Association of Realtors, estimated that homebuilders would have to build at least 1.5 million new houses a year for the shortage not to get worse, let alone stabilize.
Last December, the number of new houses climbed over the “shortage threshold” for the first time since 2006. But then Covid swept up the world and new housing starts fell off again.
Home construction bounced back, but it’s nowhere near the level needed to quench the pent-up demand.
We are in a recession. So where are the foreclosures?
Another source of houses—especially during a recession—is foreclosures. People lose jobs and default on mortgages. Then foreclosures flood the market with listings and push down real estate prices.
Thanks to the Cares Act, that hasn’t happened this time (at least not yet).
Since April, Uncle Sam has splashed out $720 billion in extra unemployment benefits and checks. The benefits were so generous that two-thirds of unemployed Americans were earning more than they had been on the job. Some even doubled their lost paychecks.
The result: during one of history’s worst economic crises, Americans’ income grew at record levels:
This windfall has prevented a tsunami of foreclosures from the 30+ million Americans that have been out of work. The chart below shows overdue mortgages stayed within the lows of the past decade.
So should you invest in the housing boom?
No one knows what will happen once Uncle Sam stops indulging Americans with generous checks. There’s also indication that some of this frenzy is simply postponed Spring home-buying.
But even when housing sobers up from the Covid high, cooled-off demand will probably run up against history’s greatest housing shortage. That means home builders will be busy knocking out houses for years ahead.
Now the key question is: where will housing demand persist?
Where is a surge in home buying a temporary blip, and where is it here to stay for the long term? You don’t want to invest in a market that will fall like a house of cards once the world gets back to normal.
A great starting point would be NAR’s map link that shows the number of permits for every new job across the states.
I’d also look into home furnishing stocks. Their prime time is yet to come with droves of new homeowners starting to outfit their new digs.
