Rising housing costs—both for houses and apartment rents—are a mystery. This is the story that Agatha Christie might have written, if Mrs. Marple were a retired economist. The solution to the mystery suggests that housing prices and rents will soon level off, perhaps even falling in some areas.
Single family home prices increased by 18% in 2021. (This figure is from the Federal Housing Finance Agency. All data in this article are for the United States.) Rising house prices would not be a mystery if the low mortgage rates had led many renters to decide they could now afford to buy houses or condos.
But apartment rents have also soared. In the 12 months through March 2022, average rent rose 17% according to ApartmentList.com. So shifting demand between renters and homeowners is not the culprit.
Rising demand for all types of housing could be explained by surging population growth. Another clue that does not comport with the mystery is extremely weak population growth. The Census Bureau estimated that in 2021 population grew by less than 400,000 people, the lowest growth in over 100 years. Increased population is not responsible for higher housing costs.
Perhaps we have not been building enough new housing units. After all, a house does not last forever. Not only do we need to replace very old housing, the nation’s homebuilders have to accommodate migration of people from the snowbelt to the sunbelt. Empty houses in Detroit and rural Iowa don’t help people moving to Florida or Texas. However, housing starts have increased from pre-pandemic levels as shown by the Commerce Department’s monthly report. In 2021 1.6 million new housing units were started, compared to 1.3 million the year before the pandemic. More new housing would certainly have eased pricing pressures, but homebuilders are erecting homes as fast as they can given constraints on labor, materials and, in some locations, buildable lots.
The usual suspects for rising housing costs are not to blame, so we must consider what Mrs. Marple would suspect: what about the roommate? Or, more accurately, the missing roommate. For the number of households soared in 2021, up 1.5 million according to the Census Bureau. The greatest proportion of the gain was in nonfamily households: people with unrelated roommates or no roommate at all.
That was enough of an increase to stimulate demand for both houses and apartments, but we’re left wondering why the sudden change to living alone? The most likely reason was high income. Disposable income (after-tax income) soared in the pandemic, thanks to stimulus payments in the first year of Covid-19 and then higher wage rates in the past year.
Possibly adding fuel to this fire have been the eviction moratoria. Normally, when people are sharing an apartment and one person moves out, the remaining person scrambles to find a new roommate to share the rent. But if rent is not being paid and evictions are not allowed, there’s no need for a replacement roommate. This is, most likely, a small factor relative to rising incomes.
So higher housing costs have been triggered by rising incomes enabling people to ditch their roommates. What does this mean for the future of home prices and rents? The outlook for property owners is not pretty. They will most likely have few gains in the coming two years, and may even have to give up some of the increases they have seen recently.
Inflation is running much higher than wage gains, and stimulus payments are in the past. People may have enjoyed not having to share their homes with roommates, but now the cost of living has risen, ranging from filling up the gas tank to buying groceries to taking a vacation. Prices are not coming down anytime soon, so some folks will accept the reality that a roommate stretches their income quite a bit.
At the same time eviction moratoria are mostly over. Higher mortgage interest rates will soon dampen demand to buy houses. The negative effect on housing prices of higher mortgage rates will be partially offset by greater desire for inflation hedges, which real estate traditionally has been. This offset will be partial, though.
The reversal of roommate preferences will dampen demand for all housing types, especially apartments. Rising mortgages rates will put the kibosh on home prices. The most likely scenario is for a leveling off in general, though specific markets may see falling house prices and rents.
“The end of the housing bubble” worries many people, but the rising prices were not really a bubble in the sense of a mindless speculative frenzy. The fundamentals of incomes and costs drove rational decisions. The current market differs greatly from the early 2000s when new home construction was triggered by speculation. Recent demand has been about people wanting nice places to live. That’s not a bubble. But even markets driven by fundamentals can see falling prices when those fundamentals change, as they are doing now.
They mystery of rising housing costs in a slow-growing population has been solved, and the next mystery is whether the correction will turn ugly. That’s certainly a possibility but not the most likely story.