[Business Insider, Getty]
- Rich Americans, millennials, and Wall Street are keeping US home prices permanently higher.
- Demand is strong as the wealthy and investors scoop up homes at historically high prices.
- A wave of millennial demand can boost prices even higher, and builders aren’t rushing to step in.
The housing market is stuck between a rock and a hard place. The rock: persistently high demand that’s lifted prices at breakneck speed. The hard place: a historic lack of supply and an inadequate response from struggling builders.
Home shoppers have wealthy Americans, Wall Street, and millennials to thank.
The buying spree that began in 2020 drove price growth to a three-decade high, and experts say they expect home inflation to remain elevated into 2022. While construction has accelerated, it remains far from the levels needed to cool the market.
The market already favored deep-pocketed buyers who can afford to outbid others and aren’t as affected by stronger inflation. Wall Street has become an increasingly powerful actor, with firms scooping up homes to rent them out for steady returns, Insider’s Alex Nicoll and Daniel Geiger reported.
With millennials squarely in their peak homebuying age, yet another lift to home demand is coming at a time of historically weak supply.
It looks now like the convulsions of 2020 and 2021 in the housing market have resulted in a new floor for house prices that’s permanently higher. Here’s why.
The market’s new floor
Wealthier Americans are snapping up many of the homes on the market. Sales of homes priced as high as $250,000 declined from June 2020 to June 2021, according to the National Association of Realtors, while homes sales for at least $750,000 more than doubled over that period.
The shift reflects just how much prices have risen across the board, Ali Wolf, the chief economist at Zonda, wrote in a June tweet. Sales of homes costing more than $300,000 took a greater share of market activity over the past year, while the market share for sales of cheaper homes declined.
The shift also comes ahead of an unprecedented demand surge. Millennials will reach their peak homebuying years from 2022 to 2024, which will lead household formation to further outstrip home inventory. The phenomenon is “historic,” and it could bring so many new buyers that prices rip higher all over again, Logan Mohtashami, the lead analyst at Housing Wire, told Insider.
“My worst-case scenario is kind of like what’s happening this year,” he said. “My concern for next year and 2023 is that there are just too many buyers and it prevents inventory channels from really increasing.”
Wall Street is providing a similar boost. Firms like Blackstone have ramped up their activity in the single-family-rental market, buying suburban homes for steady rental income. Others have partnered with homebuilders to create entire neighborhoods for rentals. While investors’ buying counts for a small portion of home sales, it’s set to grow and provide new competition for everyday Americans.
“Investors took a huge pause during the pandemic, and they still haven’t made up for all the homes they didn’t purchase during that period,” Daryl Fairweather, the chief economist at the real-estate marketplace Redfin, told Insider last month.
Don’t hold your breath for new supply
Other gauges signal contractors aren’t rushing to solve the problem. The three-month average for monthly home inventory rose to 5.5 in June, according to the US Census Bureau. In other words, there was an average of 5.5 months’ worth of supply on the housing market. That’s roughly the same level as during the previous economic expansion, though it’s more a reflection of slowing sales than rebounding construction.
Still, the signal should keep builders happy with their current pace, Mohtashami said. Contractors typically boost construction when the three-month average is below 4.3 months and curb building when supply reaches 6.5 months, he told Insider. So while buyers risk being priced out, builders are happy with the current environment, he added.
“I don’t believe the builders are ever going to have a construction boom in America,” Mohtashami said. “We’re just in an average market for them.”
By Ben Winck