Explaining the Frenzy in the Housing Market

Ever since the housing market has emerged from its pandemic-driven freeze in late spring, there has been a frenzy of home buying and a sharp rise in prices.

The common explanation is that the pandemic has swollen the ranks of those who need more private space for work and play and safety, typically farther from urban centers.

But why has that translated into fast-rising home prices all around? After all, if buying a new home means leaving behind an old one — an equal contribution to supply and demand — then what’s disturbing the market balance and driving up prices?

A number of factors are at work. Some are well known, and others — like innovations that speed up home buying — have been less noticed and seem as if they may last.

One effect of the pandemic has been to prompt many renters to make the leap into home buying. To some extent, that’s because the U.S. housing market traditionally associates multifamily housing with rentals, and single-family homes with homeownership (despite recent trends to the contrary), leaving those who want more private space fewer options except buying a home.

That accelerated departure from the rental market of home buyers has contributed to a softening of rental prices throughout the nation (as has the consolidation of households as renters move in with friends and relatives). The impact on rents is especially marked in urban areas like San Francisco and New York, where the proximity to jobs and amenities like theaters or museums that normally justifies a high price has lost relevance during the pandemic.

But perhaps the most important factor is the sheer rise in volume of buyers. Adding more buyers and sellers can generate frenzy all on its own, even without altering their balance. Home buyers flock to homes unequally, converging upon the most attractive ones, and in a thicker market that means this subset of homes draws far more buyers than before. (A market grows “thicker” when it has more participants on both sides, while holding their proportion fixed.) The experience of heightened competition around those homes affects perceptions. And when that culminates in higher sales prices, those sales serve as “comparables,” which inform asking prices on subsequent listings (including less attractive ones), lifting housing prices more quickly.

But another explanation for the current buying boom has so far largely escaped attention. Thanks to innovation, the housing market is operating faster than it used to, and that has helped make supply and demand imbalances more extreme.

Here’s how it works. Suppose that for every two sellers in the market, there are three buyers. In other words, the market is a hot one, dominated by sellers. Accelerating the pace at which buyers and sellers successfully pair up and exit the market reduces the number of buyers and sellers equally, and can be thought of as leaving two buyers for every one seller.

Because that ratio of two to one is even more unbalanced than three to two, it implies more intense competition over homes for sale. (The opposite would be true in a buyers’ market, in which faster matching of buyers and sellers would make buyers scarcer than before.) By helping speed up the home-buying process, innovations also reduce for-sale inventory and shorten the length of time homes are on the market. (In isolation, it also shortens the time buyers are in the market.)

Just as technology for remote work has been available for years — but has only now come into wide use because of the pandemic — innovations in home sale transactions have been widely embraced only recently despite being around for a while.

Those include substitutes for in-person visits like 3-D home tours, drone footage and virtual staging that lets viewers imagine how a space could be used. The innovations also include mundane but meaningful things like phone-based entry into homes for sale (no appointment necessary), or the availability of remote notary services, which streamline the transaction process.

The key here is that such innovations are likely to make home buying faster. Showing a home virtually, for example, eliminates the delay imposed by the need for a weekend open house, and a remote online notary can save time when local ones are in short supply. Again, it’s not that these innovations are necessarily new, but that they are now being taken up much more broadly than before.

All of these factors contribute to the buying frenzy, but some are likely to outlast others. The pursuit of private space because of health fears may last a good while, perhaps even for a few years, and a low-interest environment even longer. But neither is likely to be permanent.

If the pursuit of private space is driven by remote work and the need for office space in the home, there is a greater chance it will persist (though not at the shelter-in-place extreme).

But to the extent that innovations accelerating the home sale process are the culprit for a more extreme supply and demand imbalance, well, there’s no turning back the clock on that.

Sahred From Source link Real Estate

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