The US housing market isn’t as hot as it once was, but the situation is stabilizing. This is due to a combination of factors:
Low interest rates and government stimuli combined to drive buyers into the market. This accelerated appreciation rates.
Pandemic-related Demand
Homeowners accumulated $1 trillion in additional home equity in the wake of the COVID-19 pandemic, which helped fuel a housing market boom. But that boom has also created a shortage of affordable housing, pushing up prices and leaving some families and individuals without stable, secure housing options.
Home prices have risen at an unprecedented pace, as mortgage rates have dropped to near-record lows. As of late July, the median price of a US single-family home had jumped nearly 19 percent in just six months.
This surge of demand for housing occurred at a time when the supply of existing homes was already tighter than it had been in decades. In addition, the Federal Reserve’s unprecedented monetary easing, generous mortgage forbearance programs and a foreclosure moratorium lowered interest rates and boosted household incomes, helping to push up house prices.
In normal times, new construction gradually adds to the supply of homes and limits upward house-price pressure. The rapid rise in prices over the last year is a result of several factors, including a rise in home offices and single-family housing, lower interest rates, a shift toward more socially distant housing away from dense urban areas, a widespread mortgage forbearance program, and a moratorium on evictions.
Another factor driving the increase in home prices is a large increase in reverse commuters, or workers who work from home instead of commuting to an office. This group of workers is increasingly able to live and work in more expensive cities, and their willingness to pay higher home prices reflects their desire for urban amenities.
The reverse-commuter trend is a promising sign that some housing market effects are likely to persist in the longer run, even after COVID-19 is over and supportive policies have eased. However, some cities are already experiencing a shortage of affordable housing, and this could create further problems in the future.
While a decline in housing affordability may be unlikely, it is important to recognize that the current record-setting price growth reflects a nationwide shortage of housing. This shortage has implications for both economic growth and inequality, particularly among low-income households, who are now facing increasing rent burdens.
Pandemic-related Supply
The US housing market has tightened during the pandemic crisis, mainly due to an increase in demand. On the supply side, the contagious COVID-19 disease made some Americans reluctant to list their homes for sale, and mortgage forbearance programs prevented liquidity-constrained households from facing foreclosures.
This combination of factors caused a significant rise in household incomes, which then increased the demand for housing. Moreover, low mortgage interest rates helped to stimulate demand, especially since the Federal Reserve cut its policy rate to an effective lower bound and purchased large quantities of Treasuries and mortgage-backed securities during the pandemic.
In addition, there was a significant increase in home price increases, primarily in the United States. This phenomenon is a result of the increased supply and demand, and also a result of the high levels of interest from millennial buyers who were interested in owning their first houses.
However, the spatial patterns of housing price changes during the COVID-19 pandemic have not been studied much. Nevertheless, a study of the spatial effects of the COVID-19 pandemic is necessary to fill in the gaps in the literature and to understand how the impact of the pandemic on the housing prices differed from one region to another.
Based on the available data, we find that the COVID-19 pandemic impacted housing prices differently across different regions of the United States. While many coastal areas in the Northeast and West regions saw a sharp rise in housing prices, other regions experienced a decline.
We also find that the spatial pattern of housing price changes during the COVID-19 crisis largely had an ‘ring’ pattern (i.e., it changed radiantly from urban centers to suburban areas) compared with the year of 2019-2020 (before the pandemic crisis).
These results suggest that the COVID-19 pandemic negatively affected the supply of housing in the United States and caused a decline in prices. The supply of housing in the United States may have decreased as a result of the high unemployment rate during the pandemic, resulting in a lower amount of demand for new homes. In addition, the availability of mortgage forbearance programs and the widespread availability of mortgage loan modification programs may have reduced supply as well.
Pandemic-related Appreciation
While house prices have risen rapidly since the outbreak of COVID-19, the pace is more reminiscent of a normal economic cycle than of a recession. This is due to a combination of countercyclical policies, stronger financial conditions, more positive consumer sentiments and revived expectations of future price appreciation.
As a result of these factors, the US housing market bounced back in 2020, with an acceleration in house price growth (+14% year-on-year in April 2021). This surge was fuelled by lower mortgage rates and support for household incomes. In addition, a number of policy measures to protect housing markets and reduce demand pressures were introduced.
For example, the Federal Reserve lowered interest rates to an all-time low and made other countercyclical monetary policy moves. In response to the rising demand, residential investment has picked up and accounted for 4.8% of GDP in Q1 2021.
This rapid acceleration in house price growth has led some economists to question whether the US housing market is a bubble. They worry that a sustained increase in housing prices will put downward pressure on affordability and limit the economy’s potential for economic growth.
Nonetheless, there are many different ways to measure the rate of house price appreciation. For instance, the Zillow Home Value Index tracks the rate of increase in housing prices over time.
Another way to measure appreciation is to look at the ratio of house prices to rents, which can be used to assess the level of relative housing costs. During the pandemic, house prices rose at an accelerating pace, which pushed up the ratio of house prices to rents.
In some countries, such as France, house prices were already on the rise before the pandemic and accelerated even more quickly in 2020, with an annual growth rate of 12.6%. This is compared to a growth rate of just 5.5% over the period before the pandemic.
In contrast, other markets, such as Germany and the Netherlands, had been relatively flat in recent years and did not experience any significant increase in prices before the pandemic. The increase in prices during the COVID-19 pandemic was largely driven by the effects of the pandemic on the supply and demand of housing.
