The Housing Shortfall is driving up prices, but a crash is unlikely

 Summer of the Speed buyer

This recent article by chief economist of the National Association of Realtor's economist Lawrence Yun puts the current real estate market into perspective:

Remember when it could take years to sell a home.  MLSs were flooded with distressed properties.  In Miami, it was up to six years according to new accounts in the wake of the 2008 Financial crisis.

Today, of course, its the opposite story.  It's generally taking just of couple of weeks, and sometimes day, to find a buyer.  From listing to contract, homes sold in typically 17 days in April, the fastest rate ever.  In most markets, home buyers can't risk leisurely weighing several listings before committing to most likely the most expensive purchase of their life.  Rushed decisions can easily lead to buyer misgivings-about overspending for the home, its size, or having insufficient reserves for upkeep.  Still, most buyers come to see that they made the right decisions in these competitive times.  Seeing prices, and hence their wealth, rising helps.

Could it all crash as happened in 2008 to 2010?  Not likely.  The current housing cycle is fundamentally different.  We thankfully don't have risky subprime mortgages that overstretched buyer's budgets.  The gateskeepers at banks, mortgage brokers, and government regulators demand that loan-to-value ratios, debt-to-income ratios, and income documentation meet guidelines before a mortgage is approved.  To be sure, even with soundly written mortgages, we know some defaults can occur.

A second major difference is supply.  Leading up to the housing bubble heyday, builders overbuilt.  By my calculations, America had 2.1 million surplus housing units by 2006.  Following the crash, underproduction steadily chipped away at the surplus, such that inventory normalized by 2011.  Continuing underproduction led to the housing shortage.  By 2015, the shortfall was 2 million homes.  By the end of 2020, it totaled 4.8 million homes.  The lack of inventory is why home prices are in no danger of falling sharply.  

Homebuilding activity in 2021 will be slightly above historical norms, but it will take at least a few years to correct the massive shortage.  In the meantime, we expect the national median home price to rise 9% this year and another 3% in 2022.  Hyperseed homebuying should taper off by year's end as supply improves and affordability challenges persist.