Housing Market 180?
The residential housing market has done a near 180 since the end of 2021. Like an enormous cruise ship, the housing market started to turn very slowly near the end of 2021. The acceleration started gradually at the start of 2022. At the start of 2022, there were even some false signs that the rate of throttle might slow and the ship return to port. By mid February of 2022 it was clear that there was no turning back.
By early March, the mortgage market cruise ship reached open waters and quickly gained speed. Mortgage rates shot up at historic speed. In recent history, we saw mortgage rates spike. During the 2013 Fed Taper Tantrum and more recently on the morning and few days following the 2016 election. Both of these rate spikes were temporary. Over the following twelve months after both occurrences mortgage rates regained historic lows.
In 2019 and leading up to the start of pandemic lockdowns of 2020, most mortgage and bond analysts expected rates to increase. Leading up to that point, mortgage rates saw a two year run of mortgage rates hitting pre-pandemic lows. At the same time, housing inventory was also a pre-pandemic low.
What Were the Primary Causes of Low Inventory Pre-Pandemic?
Prior to the pandemic recovery that started in 2021 – the word inflation was only whispered in certain circles. The bond and mortgage rate market had experienced an unprecedented bull run. Mortgage rates fell, only occasionally impeded by temporary spikes, for nearly 35 years. During that timespan, retirees and savers on fixed income were hurt by low rates. They were unable to earn any type of interest return in a safe fixed investment. Social security rarely saw a cost of living increase. Gas and food prices also stayed in check.
Now in 2022, you can go to a neighbor’s barbeque, get in an Uber or stop at a local bar without discussing inflation. Shrinkflation, inflation, and stagflation are the catchphrases on everyone’s lips. What caused this shift? Among other things:
- During the pandemic, much of the world was shut down. Manufacturing slowed or stopped and not as many goods as normal were produced. At the same time, the Fed turned on the easy money spigot (this also happened throughout the world). Temporary layoffs and work from home caused people to spend more time than ever at home. Although stores were closed, home delivery services boomed. People had time on their hands and money to spend.
- Supply chain is a term that is now seared in everyone’s vocabulary. As the world came out of the pandemic factories were slow to ramp up. Once ramped up, they would often need to temporarily slow or shut down due to spikes in Covid cases. These same issues impact shipping, trucking, and many industries worldwide.
- The Fed was slow to react, as they did not want to slow the economy. Finally, the Fed came to terms with the idea that inflation is not currently transitory. Once they did, it is possible that they overshot the mark and committed to aggressively raise rates. At that point, mortgage rates spiked and have not looked back.
Housing and Inflation?
Currently, the United States has a deficit of five million new homes built. This deficit means that over the past 15+ years, there should have been an additional new homes built. The lack of new housing inventory over those past years has had a significant impact. Even before the pandemic existing housing sales inventory was at record lows. In 2022 the housing sales inventory is as low as it has ever been.
The combination of the spike in mortgage rates and record low inventory has slowed the housing market to a crawl. This overall slowdown in real estate activity has led to a recent drop in lumber prices. Will the reduction in lumber prices cause other commodities to fall and housing prices to drop? Until new housing starts hit the market it seems unlikely that housing prices will drop much.