Gimme Shelter: What’s Driving America’s Wild Housing Market?


Gimme Shelter: What’s Driving America’s Wild Housing Market?

US housing prices are soaring: The FHFA House Price Index posted a year-over-year rise of 15.7% in April, the biggest increase in 30 years. What is driving the blistering rise in home prices? Is it low rates? Fed liquidity? Changing demographics? A bit of each?

The real culprit is a lack of supply. It’s not historically normal for 10 or 20 bidders to compete for a house, as is happening in many hot markets today. With too many people bidding on too few homes, buyers get frustrated (or even panicked) about the lack of choice and irrationally bid up prices. People need shelter, and when they’re ready to buy a home – due to life events like having children, or because they finally have the money to do so – they will find a way to buy. And if inventory is low, things get wacky.

Let’s look at housing trends since 1998.

US Inventories Have Dropped as Housing Starts Lag Demographic Trends

US Inventories Have Dropped as Housing Starts Lag Demographic Trends

Source: Bloomberg, National Association of Realtors, and U.S. Census Bureau as of 29 June 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

As the chart shows, prior to the housing boom of the early to mid-2000s, the US was building 1.6 million new homes per year (see purple line) and selling about 6 million existing homes and 770,000 new homes per year (see blue and orange lines). The inventory of homes for sale was extremely steady at about four months, on average (see white line).

Then came the financial crisis and housing crash. Housing starts plummeted to 600,000 per year in 2008, a 62% decline, and hovered around those lows for several years. Starts and sales began to rebound in 2011, but by 2014, starts were only back to about 1 million per year – and at the same time, a secular decline in the months of inventory of homes for sale was taking hold (see white line and arrow). Builders just had not replaced the supply lost after the financial crisis, yet population growth and household formation still kept chugging along.

Housing starts and new-home sales are now back to where they were in 2000, but inventory, at 2.5 months, is much lower. Existing home sales of 5.8 million are also back to 2000 levels, but given population growth and other demographic shifts in the intervening 20-plus years, that number should be much higher.

The result is more buyers chasing fewer homes, and with that comes price spikes.

Will homebuilders save the day?

In a word: No. Homebuilders as a group got burned during the global financial crisis and are not likely to risk overextending themselves again. According to a recent S&P Global Ratings report, the National Association of Realtors (NAR) estimates that homebuilders would need to build at least 5.5 million extra new units to meet demand and keep homeownership affordable over the next 10 years.1 Yet many builders are hesitant to extend themselves. While lumber prices are coming back down, many Covid-related supply-chain challenges still persist. With ongoing difficulties sourcing supplies and labor, homebuilders are not committing several months in advance, as needed to accelerate production.

Low rates meet the generation gap

Many are asking whether the Fed is to blame for the wild housing market. Again, we think the answer is a qualified no. While record-low interest rates are certainly playing a role, the decline in inventory began all the way back in 2014 (see chart, white line and arrow). Moreover, low rates are colliding with generational challenges in 2021 to increase demand and reduce supply: Pent-up demand from Millennials, a generation that appears to have skipped “starter” homes and is now taking the market by storm, is colliding with baby boomers, who are increasingly opting to “age in place” in their homes rather than downsizing.

While higher rates could slow this pattern, they won’t derail it on their own. If people are yearning for shelter, they will continue to bid up homes.

Gimme shelter: Sidestepping a bubble and crash?

If current trends stay in place for another year or so, we see potential for a real buyer’s strike or a “capitulation level” of prices and inventory at which many buyers will simply give up and opt out. This could usher in a slowdown in overbidding that would help rein in prices and further normalize the supply of inventory.

However, a slowdown in irrational bidding does not cause home prices to fall rapidly – distressed sellers do. The buyers in the past 12 months have had extremely strong credit scores and balance sheets and are not overextended,2 so we don’t expect to see distressed sellers anytime soon.

Current price increases are not sustainable. The buyer burnout likely to result from a lack of home choices and ever-increasing prices may already be showing up in the most recent mortgage application data (MBA Purchase Index). Even with mortgage rates nearly three-quarters of a point lower than where they were before Covid, the MBA purchase index is now back to pre-Covid levels (see chart).

Despite Lower Mortgage Rates, Mortgage Applications Are Back to Pre-Covid Levels

Despite Lower Mortgage Rates, Mortgage Applications Are Back to Pre-Covid Levels

Source: Bloomberg, Mortgage Bankers Association, US Home Mortgage 30-Year Fixed National Average, as of 2 July 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

A slowdown in home price increases is thus highly probable. But are widespread price declines imminent? Probably not. Again, rapid price declines are generally precipitated by distressed sellers, and recent buyers are not overleveraged. Moreover, foreclosure moratoriums implemented during Covid are keeping distressed homes from reaching the market.

All told, while we think the wild US housing market could persist for the time being, it will ultimately avoid a hard landing.


1 See “Credit Conditions North America Q3 2021: Looking Ahead, It’s Looking Up,” S&P Global Ratings, 29 June 2021.
2 Ibid.


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