Housing Shortage Is Driving Up Prices, But A Crash Is Unlikely!

Remember when it could take years to sell a home? MLS’s were flooded with distressed properties. In Miami, it was up to six years, according to news accounts in the wake of the 2008 financial crisis.

Today, of course, it’s the opposite story. It’s generally taking just a couple of days to even hours, to find a buyer. From listing to contract, homes are typically sold within a week, the fastest rate ever. In most markets, home buyers can’t risk leisurely weighing several listings before committing to likely the most expensive purchase of their life. Rushed decisions can easily lead to buyer misgivings—about overspending for the home, its size, or having insufficient reserves for upkeep. Still, most buyers come to see they made the right decision in these competitive times. Seeing prices, and hence their wealth, rising helps.

Could it all crash as happened from 2008 to 2010? Not likely. The current housing cycle is fundamentally different. We thankfully don’t have risky subprime mortgages that overstretched buyers’ budgets. The gatekeepers at banks, mortgage brokers, and government regulators demand that loan-to- value ratios, debt-to-income ratios, and income documentation meet guidelines before a mortgage is approved. To be sure, even with soundly written mortgages, we know some defaults can occur.

A second major difference is supply. Leading up to the early 2000’s housing bubble, builders were overbuilding. America had millions of surplus housing units by 2006. Following the crash, underproduction steadily chipped away at the surplus, such that inventory normalized by 2011. Continuing underproduction led to the housing shortage. By 2015, the shortfall was 2 million homes. By the end of 2020, it totaled 4.8 million homes. The lack of inventory is why home prices are in no danger of falling sharply.

Homebuilding activity in 2021 was slightly above historical norms. But it will take at least a few years to correct the massive shortage. The national median home prices rose about 16.9% in 2021 from 2020 (the highest on record going back to 1999, according to the National Association of Realtors) and another projected 6% to 8% in 2022. National Association of Realtors further predicts 6.2 million units sold with a median price of $358,000. and new home sales of 744,000 new home sales. Accelerated homebuying should taper off by year’s end as supply improves and affordability challenges persist.

~Written with the help of content from National Association of Realtors and Lawrence Yun