Written by Jimmy Hefter
As the economy is starting to bloom again in a post-pandemic society, there are major consequences on the housing market. To increase demand during the COVID-19 pandemic, the Federal Reserve slashed mortgage-interest rates. This significantly increases the aggregate demand for housing, as the money people have to spend in the future is higher. However, at the same time as this jump in demand, the supply of homes on the market is still low due to the pandemic, therefore creating a massive shortage (Friedman). People are cautious about selling their homes, either because of possible infection in open houses and/or low interest rates. Also, people are worried that they will not be able to compete in this chaotic market, increasing their reluctance (Friedman).
Monthly home sales in the United States increased by .8% in October, which is the highest percentage since January. The aforementioned interest rates and current economic conditions are amplifying these sales, which is leading the United States into a housing market where sales have not been this high in 15 years (Friedman). Due to rising sales, home prices are increasing as well. Because of the shortage of housing, wherever home prices are inflated, bidding wars are readily apparent (Friedman).
(Friedman, 2021)
The figure above perfectly illustrates how crazy the current housing market is. The chaotic market with skyrocketing demand forces buyers and sellers to reach a deal absurdly quickly. This shows the unpredictability of the housing market as “the typical home sold in October was on the market for 18 days, up from 17 days the prior month” (Friedman). This is extremely fast for a house to be listed and sold, highlighting the high demand from consumers across the country. This fast moving market forces buyers to take massive risks and to compete in bidding wars when they could have realistically bought the house for a much cheaper price. Many people have been sidelined, where around “two-thirds of active buyers have been house-hunting for at least three months” and about 45% of those buyers claimed they had been unsuccessful in bidding with other people (Friedman). This is a shame because people have been saving money and reaping the benefits of an increasing stock market, so they want to move, but it is practically impossible due to the sheer number of buyers in this inflated market.
To see the impact of the raucous housing market, it is beneficial to look at real-world examples. In Raleigh, North Carolina, “Home values are forecasted to soar nearly 24% in the capital city’s real estate market, pushing a typical home value to well over $450,000 from the current average price of $391,444” (Smith). This is the third hottest housing market in the country, only behind Tampa and Jacksonville, both cities in Florida. There is an interesting pattern occurring where home sales are increasing the largest in the Sun Belt region, where the states are “below 36 degrees 30 minutes north latitude” (“Large, Young”). This area consists of 15 states, spanning from southern California to Florida. There is an issue brewing, however. These states are becoming increasingly inflated, as seen through home prices, and at the same time, income is stagnant, so cities in the sun belt region are becoming less affordable for people. It will take increased urban policy to counteract this growing problem.
To get the economy back to normal, the Federal Reserve needs to enact counter-cyclical policy to lower inflation. The Federal Reserve “wants to end the bond-buying program, a form of economic stimulus, before it lifts short-term rates to curb inflation” (Timiraos). The bond-buying program helped the country during the pandemic, so by stopping this, it will ultimately lower productivity and therefore prices. However, the recent meeting between Fed leaders demonstrated that there could be a “fast approach”, meaning that the greater concern for inflation could lead the federal reserve to raise interest rates quickly (Timiraos). Jerome Powell, Chairman of the Federal Reserve, has become more distressed with inflation in the country, so there is a possibility that the Fed will change certain policies because of the uncertainty of the time we live in. The contractionary policy that will likely be enacted in the next few months will have a major impact on the housing market, particularly the role of interest rates. When interest rates are higher, there will be less of a willingness for people to loan out money, ultimately leading to the dropping of home prices. This will not be immediate, however, as 2021 has been one of the most chaotic years for housing prices in the history of the country, so it will take time for the prices to level out.
The rapid movement of the sales of houses is concerning for typical buyers, as homes are being snatched from the market quicker than people can blink, and as a result, inflation is taking its course in rising house prices across the country. People are generally risk averse, so the chaotic nature of the housing market is remarkably worrying for people. The Federal Reserve needs to be aware of these prices and will need to ultimately increase interest rates, enacting counter-cyclical policy.
Works Cited
4, Rick Smith — January. “Report: Raleigh Will Be No. 3 Hottest Housing Market, Prices to Soar 24%.” WRAL TechWire, 5 Jan. 2022, https://www.wraltechwire.com/2022/01/04/report-raleigh-will-be-no-3-hottest-housing-market-p rices-to-soar-24/.
Friedman, Nicole. “Homes Now Typically Sell in a Week, Forcing Buyers to Take Risks.” The Wall Street Journal, Dow Jones & Company, 11 Nov. 2021, https://www.wsj.com/articles/homes-typically-sell-in-a-week-forcing-buyers-to-take-risks-11636 632000?mod=article_inline.
Friedman, Nicole. “Hot Housing Market Leaves People Afraid to Trade Up.” The Wall Street Journal, Dow Jones & Company, 4 June 2021, https://www.wsj.com/articles/some-homeowners-arent-selling-because-they-cant-afford-to-trade- up-11622799003?mod=article_inline.
Friedman, Nicole. “U.S. Home Sales on Track for Biggest Year in 15 Years.” The Wall Street Journal, Dow Jones & Company, 22 Nov. 2021, https://www.wsj.com/articles/u-s-home-sales-on-track-for-biggest-year-in-15-years-1163759379 0?page=1.
“Large, Young and Fast-Growing Sun Belt Metros Need Urban Policy Innovation.” The Kinder Institute for Urban Research, https://kinder.rice.edu/urbanedge/2020/06/11/urban-policy-sun-belt-states-population-growth-rat e-housing-employment.
Timiraos, Nick. “Fed Minutes Point to Possible Rate Increase in March.” The Wall Street Journal, Dow Jones & Company, 5 Jan. 2022, https://www.wsj.com/articles/fed-minutes-reflect-growing-unease-over-high-inflation-11641409 628.