How far can the resurgent real estate market go?

A 2,900 square foot 1960s-era colonial in suburban Boston that listed for $969,000 recently sold for $1.275 million, greater than 30% or $300,000 over the asking price. Today’s buyers — competing with dozens of others — are dropping many of the standard contingencies, including a home inspection. They’re also making offers on homes sight unseen.

This very scenario is playing out in suburbs across the U.S., from Allentown to rural Maine. Homes are selling for well above list prices, and they are selling fast. Nearly half of homes listed in April, for example, sold in less than a week¹. Potential buyers are making concessions and all-cash offers. Many are also opting to rent single-family homes. 

The pandemic stoked an age-old American urge to pull stakes and move, but there are precious few places to go. Demand for homes is expected to outpace the housing supply for many years². A dearth of listings across the U.S. gives sellers and landlords the upper hand, especially as many families seek to relocate from pricey metro areas to suburbia. There is a massive deficit of available homes stemming from underinvestment coming out of the global financial crisis. An epic stock market, rising home equity, low interest rates, and increased savings, has more capital chasing a limited amount of inventory. 

Working from home and loving it

Americans changed many behaviors during the pandemic. Perhaps the most significant shift has been adapting to a work-from-home (WFH) lifestyle. Many companies are now guiding workers to return to the office. But many workers have enjoyed the WFH aspects of the pandemic. Research shows that of workers that can WFH, about 30% wish to do so full time, while more than half of them prefer to work two days in the office and three days from home³. That alone is a tectonic cultural shift. According to the Pew Research Center, before the pandemic, about 7% of the U.S. workforce had access to a “flexible workplace” benefit.

Many employers are satisfied with the “great WFH experiment” as productivity increased, and they realized cost savings on travel and pricey downtown office space. Sensing a shift and fearful of losing top talent to more flexible competitors, many employers are granting greater flexibility for remote work. 

No one knows whether the remote work trend will continue once the pandemic ends. With more flexibility, however, many people are moving anyway—especially away from downtown areas to commutable suburbs. For every 100 people who left the New York City metro area during the pandemic, 84 people moved in. By comparison, for every 100 people who left suburban Hudson, N.Y., 197 people moved in⁴.

Buying and renting in suburbia 

The trend of moving away from pricey metro areas into suburbs is nothing new, but it accelerated during the pandemic. Housing prices have increased in the nation’s most desired metro areas for many years. Now that many more office dwellers can work remotely, they are choosing to live further away from downtown offices.

During the pandemic, the most prevalent home buyer type has been the “move-up” buyer, or those looking for a bigger and better house — one with room for a home office, a gym, or a bigger yard. Relocation buyers are the second largest buyer group. First-time home buyers are third on the list – but there are fewer of them now as they are squeezed out by the other groups, who are flush with cash. According to the National Association of Realtors, the proportion of first-time buyers fell to 31% – the lowest level since 1987⁵. 

Priced out of the market or simply seeking greater flexibility, many first timers are instead opting to rent in suburban subdivisions. Single-family rentals (SFRs) are rapidly increasing in popularity around the country. Today, about 6% of new homes built in the U.S. are “built-to-rent,” a figure expected to double by 2024⁶. Last year, 50,000 new SFRs were built, which was 66% greater than the yearly average going back a decade⁷. Many millennials prefer the flexibility and hassle-free nature of renting. There’s no maintenance required, and when the lease is up, you can move somewhere else.

How a chronic home shortage fueled this fire

While psychology and a cultural shift on work/life balance are big factors in the frenzy, many pre-COVID trends set today’s housing market conditions in motion. The industry is still adjusting after the crash that nearly cratered the global financial system in 2008. That bust caused problems that continue to plague the market today, leaving America woefully under-housed. The National Association of Realtors recently estimated that new-home construction fell 6.8 million units short of meeting the nation’s housing needs over the last decade⁸. 

New housing starts never recovered from the 2008 crash

Homebuilders are struggling to meet demand

When buyers materialized en masse during the pandemic, homebuilders quickly sold out of their available inventories. The buyers keep coming, however. There’s not much left to sell them.

The industry has ramped up production to levels not experienced in 15 years. But the lingering problems caused by 2008 continue to dog home builders. And pandemic-related supply issues didn’t help, as the cost of building materials skyrocketed. According to the National Association of Home Builders, lumber costs tripled year-over-year, adding more than $35,000 to the cost of building a new home⁹. 

There is a bigger problem than the cost of a 2×4, and it threatens to stall the industry for years: the industry is understaffed. There are an estimated 1.7 million new housing starts in 2021. For those to finish this year, the industry would need to hire over 400,000 new workers. But those workers don’t exist. The industry has added just 43,000 laborers year-to-date¹⁰. 

This boom is nothing like the last one

There may be a temptation to wag one’s finger at a robust housing market by pointing to 2008 as a parable of financial hysteria and ruin. But there is little comparison between the two periods. In the run-up to 2008, builders overbuilt while lenders lowered their credit underwriting standards, including the removal of the need to prove income. So far, mortgage availability remains well below 2008 levels, as well as pre-COVID, according to the MBA Mortgage Credit Availability Index (shown below). Given the current supply shortage and continued pent-up demand, the current market is likely to remain unbalanced with demand continuing to outpace supply, while the SFR markets are also expected to attract increased demand. Prices may ease somewhat, and there is evidence of that happening now, but it could take several years for builders to catch up with the current demand for housing.  Americans saved more than ever during the pandemic and continue to have access to historically cheap credit. And they want to buy or rent homes in the suburbs. But there are few places for them to go – unless they are willing to pay. 

Notes

1. Zillow, ‘The Need for Speed: Almost Half of U.S. Homes Sell in less than a Week’, May 22, 2021
2. Wall Street Journal,  ‘U.S. Housing Market Needs 5.5 Million More Units, Says New Report’ 
3. National Bureau of Economic Research, ‘Why Working From Home Will Stick,’ working paper, April 2021
4. Citylab, How Americans Moved’ April 26, 2021
5. National Association of Realtors, Pandemic Caused Buyers to Seek Multi-Generational Homes, Sellers to Sell Faster, November 11, 2020.
6.  Wall Street Journal, Built-to-Rent Suburbs are Poised to Spread Across the U.S.,June 7, 2021.
7.  GlobeSt., Single-Family Rental Construction Up 66% During the Pandemic, April 23, 2021.
8.  Wall Street Journal,  ‘U.S. Housing Market Needs 5.5 Million More Units, Says New Report’ , June 16 2021.
9.  National Association Of Homebuilders, Skyrocketing Lumber Prices Add Nearly $36,000 to New Home Prices, April 28, 2021
10.  Bloomberg, How the U.S. Ran Out of Homes for Sale, June 7, 2021