Current Hot Market May Not Be Sustainable

After lockdowns ended, the real estate market was inundated with prospective buyers who seemed to be itching to take advantage of low interest rates. Interest rates have started to climb back up, yet demand currently shows no signs of slowing, despite continuously rising prices. So what’s the actual reason demand is high, and perhaps more importantly, is it a good reason?

The stimulus packages are a likely culprit. A government stimulus is always going to effect short-term change, but its goal is also long-term change. This is done by a multiplier effect — when people have more money to spend, they spend more, which causes the money to recirculate and improve GDP. However, it’s important to realize what the money is being spent on. Between a quarter and 40% of stimulus money was spent on food, household goods, and debt, and much of the remainder was saved. The stimulus certainly helped people to get through the recession, but it didn’t actually do much to improve the economy as a whole.

From the outside, the real estate market looks like it’s recovering, since it’s becoming more competitive when there isn’t much reason for it to be any longer. In reality, most of the people who can afford to buy right now could already afford to buy before the pandemic, and the rest are perhaps falsely optimistic. The primary factor that can result in long term recovery hasn’t happened yet, and that’s job recovery. The job market isn’t expected to recover until 2025, long after the eviction and foreclosure moratoriums end.

Photo by Maria Lin Kim on Unsplash


Is sales volume a good predictor of economic recovery?

Sales volume and home prices tend to correlate, albeit on a delay of about a year. It’s usually helpful to look at changes in one to predict changes in the other. But sometimes that’s not the case — most notably, at the start of an economic recovery. Looking only to sales volume to forecast a recovery can result in some false starts.

This happened in 2008, and may be about to happen now. Home sales volume shot up between 2008 and 2009, but crashed back down the next year. This is because economic stimulus resulted in temporary buyer demand, which fell off as soon as the stimulus was used up. Now, in 2020, despite actual buyer demand, sales volume is low as a result of low inventory. Low inventory doesn’t decrease home prices, though, so they’re still going up. Pent-up demand means that as soon as the economy recovers, inventory may be snatched up quickly, resulting in another sudden burst of activity that will rapidly fall off.

So what does need to happen for an economic recovery? The answer is jobs. While sales volume may predict short-term direction of change, the job market is an excellent reflection of the housing market stability, since both homeowners and renters require income in order to make payments. Job numbers aren’t going to be stable for a while either. A full recovery of the job market isn’t expected until 2022 at the earliest, at which point we can start to see the regular patterns emerge again in home sales volume and home prices.

Photo by Chris Liverani on Unsplash