It is common to view home prices as cyclical: What goes up must come down, and no asset can keep rising indefinitely because its price would become infinitely high. That cannot be in a world where the money supply is finite.
That’s why many people view the extraordinary boom in the American residential real estate market (along with that in other developed nations) with some skepticism. That’s natural, but I caution against it. Instead, investors and buyers should recognize when external factors scramble conventional wisdom.
As a founder of a tech-based real estate brokerage operating in most of the United States, I see a once-in-a-lifetime confluence of circumstances boosting residential real estate values in a way that is likely to survive the middle and long term.
First, the facts: From April 2020 to April 2021, new home sales rose 50% and the median price rose by almost 20%; sales of existing homes increased 42% from May 2020 to May 2021 and existing home prices rose by 20%. There are several prosaic factors behind this that cannot be disputed:
• The improving job market: Fewer Americans are filing for unemployment benefits, job growth is high and the economy is growing at an annualized rate of almost 7% (after the 2020 slowdown). Americans are also quitting their jobs at record rates, which typically shows confidence in the job market.
• Compounding the demand side is the low-interest environment that has investors who seek a haven from the volatility of equity and commodity markets flocking to residential real estate. Investors poured a record $77 billion in homes in the past six months, according to Redfin. Indeed, corporate investors bought 15% of U.S. homes for sale in the first quarter.
• Lumber costs also played a role in suppressing housing starts over the past year, with lumber futures rising to a peak of $1,670.50 in May compared to just over $400 before the pandemic. They recently fell, but still caused an increase to the price of new homes of $34,000 in the past year, according to a Bank of America report.
• Taking a somewhat longer view, underbuilding has created an endemic lack of homes. According to the National Association of Realtors, there are perhaps 6.8 million homes “missing” at present. According to Business Insider, only 1.23 million new homes were built each year on average in the U.S. in the first two decades of this millennium, compared to about 1.5 million new homes a year on average from 1968 to 2000. Population growth in the U.S. has slowed down — but far less than the pace of new home-building.
• People are less inclined than before to scale down their residences once they reach old age. According to Freddie Mac, the 67 million U.S. homeowners who are over the age of 55 collectively own about two-thirds of all U.S. home equity — and about 63% of these homeowners plan to age in place while the rest plan at least one more move. This has led to growing criticism against Baby Boomers for a sort of selfishness — but this is unlikely to alter the fundamentals of the real estate market.
Alongside these factors is the Covid-19 pandemic, which has caused a once-in-a-lifetime market alteration by surfacing the fact that technology has made it possible for workers to collaborate effectively without congregating in the same physical space. Home is where you shelter, sleep and stay most of the time — and for increasingly many people, it is also the place where they work.
There are advantages to being in one space, to be sure: Many interactions occur more naturally in person. Workers can more readily be supervised and trained and it can foster camaraderie. But these are balanced by costs (commuting time, energy, hassle, the opportunity cost of not being elsewhere). In our globalized modern economy, and especially in the kinds of services and industries that dominate in developed nations, the cost side looks increasingly pointless: The person workers need to sell to, collaborate with or buy from is probably not in that same place at the same time. The idea is implausible.
Even pre-pandemic, technology was able to address this reality rather well, facilitating virtual meetings and transglobal digital collaboration that largely obviated co-location. The pandemic has sped the realization of this up by revealing so convincingly that many of the functions of an office can be replicated. The effect has been electrifying, almost akin to the internet revolution itself: Just as you do not need to fold paper and buy envelopes and lick stamps to correspond, so it is that you do not need to travel distances in order to collaborate. Certainly not all the time.
It is now widely accepted that not all workers will return to pre-pandemic office attendance levels — many companies will not require it. Rather, they will work at least some of the time from home. So, employers are decreasing their office footprint. Instead of having a central office, employers now have many micro-satellite offices in their employees’ homes.
I predict this will suppress office real estate values (perhaps moving momentum to shared office companies) while raising the value of homes. Homes will need more space and facilities. As employers realize this situation requires them to participate in the cost of those changes — a process that is in its infancy today — that will improve affordability of homes for many people and further drive demand.
Considering all the above, the conclusion becomes clear. We are likely witnessing a historic repricing of residential real estate assets due to a historic transfer of life functions to the home, a burst of liquidity and a shortage of supply.