Characterizing the national rise in housing prices as a “boom” is starting to feel like an understatement as many parts of the country have witnessed nuclear explosions in listing price.
Interestingly enough, this rise doesn’t seem to be anything precarious akin to the bubble burst that caused the Great Recession nearly 13 years ago. In fact, these values are on much firmer ground, meaning you should expect the lofty price tags to stay until government policies and inventory woes can adjust.
“When we think about housing inflation, we are actually thinking about the part of the house price that is related to the costs associated with living in a home, such as a place to sleep, eat and entertain. But the other part of the home is the investment part.” said Michael Neal, a senior research associate at the Urban Institute’s Housing Finance Policy Center.
He continued, “What we have found in our work is that the change in the living costs has actually slowed, while we’ve seen a marked acceleration in the investment portion of home prices.”
What Neal is saying is that the rise in home prices will, more or less, persist. That spells trouble for broader concerns about inflation. Politico reported this past weekend that high housing costs could push inflation two percentage points higher and slow the post-pandemic economic recovery.
Looking at the past year’s data for the Northern Virginia market shows how solid home prices have been.
The number of home sales in the region certainly hit rough patches in 2020, according to MLS data from the Northern Virginia Association of Realtors. Both April and May of last year saw 20 percent dips in the area, and in Falls Church, home sales were down both 21 percent (19 total sales in April) and 50 percent (16 total in May) compared to 2019.
Yet home prices remained fairly stable. In April of last year, the average price of a home sale in Falls Church was just over $1 million; this April, that number was just under $1 million. And in May of 2020, the average price of a home sale was around $850,000; a year later, that number would shoot up to $965,000.
The trajectory has continued to point up. For the month of June, usually the first month the market starts to ebb a bit, Falls Church saw increases in both average home sale price and the number of homes sold year-over-year.
A large part of that is due to the policies put in place by the federal government (namely, cutting interest rates to historic lows) to encourage spending. Mortgage lenders responded by making their borrowing requirements more stringent, where they favored those with unblemished credit histories and people who could afford large down payments.
Stricter standards from lenders meant only the most financially secure could get in on the boom — those who were either already homeowners and had the latitude to refinance their mortgages, or those whose employment wasn’t affected by the pandemic, as Neal put it. Essentially, it’s been a competition between the “haves,” and not a race involving people who were at risk of defaulting on their mortgages a la the ingredients of 2008’s housing crisis.
Basic economics says if supply outstrips demand, then prices will naturally fall to try to meet people where they are. As you may have guessed, that means the onus for making homes more affordable has fallen on the builders who produce them.
That’s not as easy as you might think. Jennifer Landers, the president of custom home builder New Dimensions, Inc. that focuses primarily on the Arlington-Falls Church-McLean area, has been experiencing difficulties with her own suppliers.
For example, one overseas supplier is crucial for New Dimensions to assemble windows back here in the U.S., but their in-house problems cause delays that in turn stall Landers’ company from putting together a new home.
Another example is the national resin shortage. The material, which can be used to preserve the wood sidings on homes, has been harder to come by, and it’s causing backups in Landers’ work as well.
New Dimensions is slightly different from other builders in that they typically construct a home with a client in mind, rather than build a home and put it on the open market. But their problems with suppliers, and the rising costs of acquiring their goods, is a pain felt across the country.
“I’ve been on nationwide calls with other builders, and the problems are widespread,” Landers said. “The material pricing is widespread, but also the availability of materials is something everyone is struggling with.”
In her own conversations with suppliers, it’s a combination of both their struggles in acquiring capital (some overseas connections are having issues getting ahold of shipping containers), and for domestic manufacturers, it’s getting the necessary labor to come and work for them.
The result of all this, according to Neal from the Urban Institute, is fewer starter homes are being constructed. Renters who were looking to transition into one, Neal added, are getting boxed out by more well-to-do applicants.
The market will ultimately do what the market does, though there are a few things federal, state and local governments can do to make housing more accessible. Landers mentioned how the National Association of Home Builders has lobbied the Biden administration to loosen restrictions on getting lumber from Canada, which would transfer lower costs to consumers in the process.
Neal, meanwhile, said the City of Falls Church could partner with the state to receive funding for construction subsidies and look into relaxing its zoning laws to allow for higher density (think duplexes). Another possibility is creating some kind of down payment assistance for those who’ve historically been locked out of the housing market — such as racial minorities.
Then again, Neal also believes a lot of this could be remedied by the Federal Reserve’s mortgage policy.
“The wild card will be the trajectory of interest rates more generally,” Neal said. “We’ve started to see mortgage rates soften a bit in recent weeks. As the Fed gears up for normalization, you know, over the next two to three years…higher house prices and higher mortgage rates could worsen affordability and cause the market to cool.”