What’s behind the housing boom? And will it last?

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[ "Gregg Smalley, CFA" ]
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Low supply and an exodus from major cities helped lead to a housing boom. How long will the high demand last, and what does it mean for future homebuyers?

The housing market emerged red-hot from the pandemic, with the median U.S. home price hitting a record $363,300 in June — up 23.4% from the previous year.1 We believe this robust housing recovery is driven by long-term demographic trends, as well as strong earnings and household balance sheets, rather than just a temporary pull-forward of demand. Here are some recent developments and their potential impact on our view of the housing market: 


Strong demand should persist, despite flattening out.
Increased demand began to emerge prepandemic. Millennials began to have children, which is typically the catalyst for moving into a single-family home. During the pandemic, demand surged. Trends to move out of urban centers and into single-family housing accelerated. Demand for new homes (reflected in homebuilder sentiment) has come down slightly but remains near historically high levels.


Home supply has become constrained. 
The inventory of for-sale homes continues to be near all-time lows. Rising costs are causing homebuilders to be more cautious when they take requests for new homes. Building materials are becoming more expensive, particularly lumber. In addition, some homebuilding components have been in short supply, including windows, millwork and appliances. Labor shortages and longer wait times for municipal authorities to approve lot permits and entitlements have also contributed to longer build cycle times. Because builders don’t want lead times to get overly extended, which would possibly result in lower margins, they’re deliberately slowing down orders in line with the pace of production. 


Declining affordability is a possible headwind. 
Supply constraints have led to the widely reported conditions of bidding wars for existing homes, where homes are selling well above asking price. These conditions lead to buyer fatigue — potential buyers absorb “sticker shock” on new home prices and often fail in multiple bidding wars. But while the recent rapid increase in home prices has dominated the discussion of the housing market, higher prices are at least partially offset by a move to lower the cost in suburbs or smaller cities and towns. 


We believe the duration of the housing upcycle will be longer than consensus expectations, supported by strong fundamentals, the tight supply of new and existing homes, and continued secular demand from the millennial age cohort. We continue to monitor mortgage interest rates, which have remained range-bound and could be a wild card. More broadly, we recognize that since housing is an important driver of economic growth, a stronger housing market could help support the continued macroeconomic expansion and lift financial markets. 

 

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