Extraordinary and unexpected pandemic increase in house prices...

14 Replies

Here is an article by Don Layton: Senior Industry Fellow at Joint Center for Housing Studies of Harvard University: "The extraordinary and unexpected pandemic increase in house prices: causes and implications" Click here to read the article: Harvard University

It's a fascinating read for anyone trying to understand our current residential real estate environment and why some markets are seeing crazy appreciation during the first 4 months of 2021. As a residential real estate investor since 2001 this current real estate market makes my head hurt because it makes no sense. This articles helps explain it a bit...

@Sang Yi you may find the above post interesting. It provides some real world data on Vegas housing and thoughts about the real estate market in general from a Harvard industry fellow. I know SFRs aren't your target purchase but I just helped an investor purchase a single family home in Summerlin 89144. List price was $419k. Accepted offer was cash and $30k. Seller received 27 offers in less than a week. Just crazy the dynamics between supply and demand right now in our local market. 

Whoever wrote the article should have just joined BP a year ago. There were tons of us who predicted price increases and many many more that said it certainly wouldn’t lead to a decrease in prices. 

There are 10’s if not hundreds of billions waiting to invest in real estate at the slightest discount.

Interest rates are at all time lows.

Neither the FED or no any branch of the government wanted to see a repeat of the GFC.

Neither the outgoing president nor the new president want to be blamed for anyone losing their house. 

‘Anyone that bought more than a year ago had enough equity to sell at a gain so no mass foreclosures. 

unprecedented stimulus and unemployment payments. After all the government is your guardian now. 

it could have hit apartments as people fled to housing, but all the "housing prices" the news talks about is SFR. They couldn't care less if apartment building prices collapsed.

Interesting points about the 2nd homes and pre-retirement bulge.  I would also add improving existing primary homes if that's not in there. 

I agree forced savings from not going out and FOMO accelerated buying patterns that would normally take a few years to develop and involve selling first.  

Thanks for sharing!

Check out just about any thread with afraid of peak, looking to buy afraid of peak, should I wait to buy, should I wait for the coming foreclosure crisis to buy, foreclosure crisis coming sell now, there are at least 50 threads with those titles. And you’ll see the same people arguing there wasn’t one coming and stating most of the arguments I listed above. 

Along with my favorite I forgot to list. Someone selling doesn’t make any more inventory unless that person is moving in with someone else, otherwise they’re just a buyer and a seller.  Reminds me of when the new reporters say “there were more sellers than buyers today as the stock market went down.” Nope, there were exactly the same number. :-)

Originally posted by @Bill Brandt :

Check out just about any thread with afraid of peak, looking to buy afraid of peak, should I wait to buy, should I wait for the coming foreclosure crisis to buy, foreclosure crisis coming sell now, there are at least 50 threads with those titles. And you’ll see the same people arguing there wasn’t one coming and stating most of the arguments I listed above. 

Along with my favorite I forgot to list. Someone selling doesn’t make any more inventory unless that person is moving in with someone else, otherwise they’re just a buyer and a seller.  Reminds me of when the new reporters say “there were more sellers than buyers today as the stock market went down.” Nope, there were exactly the same number. :-)

 Yup, Im one of the people whose beeb responding to those crash posts for a looong time now. 

Our market slightly slowed in March 2020, then continued in April 2020 on its normal hot trajectory. We went from 6 weeks of inventory in February 2020 to 3 weeks in April 2020 in DC. Cut the supply in half, and rising prices were the only logical outcome.

Now in addition to an inventory crisis, we have an inflation crisis with material costs increasing immensely and quickly, which will and is leading to further price increases. This is going to be a multi year issue of rising prices.  

Good point @Russell Brazil

I forgot to add lack of labor, builders willing to take a risk, closed government offices to approve permit or do inspections, and rising costs of building supplies will cause new homes prices to rise 10-20%. Guess what used house prices do when new house prices rise. 

@Heidi Rice this is basic economic theory. In a typical recession unemployment, income and savings drop, but there is a corresponding drop in spending and consumer demand.

The pandemic caused an increase in unemployment, but not reduction in income or savings. The government quickly dumped money in the form of extra unemployment and stimulus. The $600 bonus unemployment was the equivalent of making $16 per hour! Loan payments for mortgage, car payment and student loans were all frozen - even if you had no drop in income. At the same time, consumers stopped spending. People were unable to go on vacations, go to performance events or go shopping at the store. That means people put all their money in the bank. People banked huge amounts of savings. 

On the supply side, we came into the pandemic with low housing inventory. During the pandemic new construction slowed as it became difficult, expensive or even not legally possible to build. On top of that less people were listing houses for sale, so inventory dropped even more. Interest rates dropped, which gave people 25% more buying power compared to late 2018. Supplies of everything have dropped. Either companies were unable to produce due to COVID related operation issues or they chose to reduce production for cost savings. As things are bouncing back, the supply chain can't catch up which increases costs on everything. 

So we have excessive consumer savings, pent up demand and low supply. It doesn't require having a PHD to figure out this one.

Something else people aren't talking about is the effect of those who died. COVID deaths are weighted to our older population. This has increased generational wealth transfers. You see people all the time on BP saying they have $100,000 (or whatever sum) to invest. How do you think people randomly end up with large sums of money? 

I was one of the people that said a crash wasn't in our near future. Looking forward now, I see a few years of prosperity in the early 20's. Housing prices will eventually stabilize, because supply and demand always find equilibrium. Notice I said stabilize, which means return to a more predictable annual increase. 

Originally posted by @Eric Bilderback :

@Bill Brandt

I don’t recall many on BP calling for a spike in home prices.  Whoever saw that is way smarter then me.  I was hoping and thought homes would become more affordable for investors and regular buyers.  

 People see what they want and believe mostly what matches their existing bias. You were hoping for more affordable prices, so your brain discounted all of us who were saying prices wouldn't drop. You say you didn't see it, but that is only because you were not looking for it. 

@Joe Splitrock . I agree with your post. Here are some additional factors I'm seeing in our local residential market impacting supply and demand:

1) investors swarmed our market from 2010-2017. Almost half of detached single family homes are owned by cash investors and these rentals houses are occupied by Tenants.
2) There is a Governor mandated eviction moratorium through May 31st, 2021. Landlords cannot serve evictions notices to get Tenants out which is limiting our housing supply. This has been extended multiple times and there are concerns it may be extended again
3) The governor has also limited landlords from serving 30 day “no cause” notices to vacate. Landlords are having a hard time gaining control of their properties which is limiting supply
4) Some homeowner’s are terrified of COVID and would have wanted to sell but don’t want strangers entering their house (limiting supply)
5) As a real estate broker and property manager many houses are being sold and rented to people moving here from out of state for remote work or other reasons. We have a tremendous increase in demand
6) Shannon Chambers, president of Home Means Nevada, a state-affiliated nonprofit organization that assists homeowners, estimated that more than 8 percent of mortgage loans in the state are in forbearance, which she said is upwards of 100,000 loans. Just an interesting fact. I don't believe they will become foreclosures.
7) CA residents are coming to Nevada for the low cost living, no state income tax and other reasons…this is pushing up demand.

@Joe Splitrock

That is a fair critique.  But from what I recall most of us (I could be wrong) did not expect such intervention.  I also wanted and thought Americans would demand bringing back production jobs and not having an economy based on consumption and finance.  I was really smoking the hopeium on that one!  LOL  

Originally posted by @Eric Bilderback :

@Joe Splitrock

That is a fair critique.  But from what I recall most of us (I could be wrong) did not expect such intervention.  I also wanted and thought Americans would demand bringing back production jobs and not having an economy based on consumption and finance.  I was really smoking the hopeium on that one!  LOL  

 Good point. Right when the pandemic first hit, my message was give it a little time and if you do a deal now, ask for discounts. I said give it a little time, because the full scope of the virus was unknown and the government response was a wild card. In the early days of the pandemic, there were people who got money off on deals. The majority of people have been saying for years that their "gut tells them a crash is coming". The numbers have not supported that. I have said before that the housing crash that resulted in deals back in 2010-2012 started years earlier with excess supply and increasing days on hand. We will know when the market starts softening. 

One thing that will keep pricing on the higher side is materials costs in new builds is up.  So new builds and reno costs will increase as a result.  I am not sure those costs will drop. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you