Will 2020 Bring a Housing Bubble?
- Oct 21, 2019
The answer to the question “When will the next housing bubble burst?” depends on who you ask. If you ask commercial real estate executives, many would say there is no bubble. Development activity is consistent in most U.S. markets, employment is strong, and the capital markets continue to be prudent this time around. If you ask housing advocates, however, they would point to the gap between price increases and wage growth, and the dearth of affordable options. Add in student loan burdens on Millennial consumers and less-optimistic economic forecasts, and a new housing bubble might not seem so improbable.
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According to Yardi Matrix’s National Multifamily Report, rents in the U.S. increased by 3.2 percent year-over-year through September. The highest rise was in the workforce sector, with an appreciation of 3.3 percent compared to 3.1 percent in the case of high-end units. Meanwhile, a forecast by the Korn Ferry Institute shows that the average salary growth in the United States will be 3 percent in 2019—the same as 2018 and 2017. When adjusted for inflation, however, the real growth is a mere 0.6 percent—down from 1 percent last year.
“Housing affordability has become a growing concern. It isn’t just a concern for extremely low- and very low-income population. It’s really a problem all the way up to (the earnings level of) 120 percent of median income and in some of the coastal big cities,” said Christopher Ptomey, executive director of the Urban Land Institute’s Terwilliger Center for Housing.
Ptomey describes the generalized epidemic of affordable housing shortages as a type of “market failure” and believes that the time is right to address it. In addition, rent control laws are only fuel for the fire.
Doug Bibby, president of the national Multifamily Housing Council, agrees: “These policies may, in some cases, be well-intentioned, but they are short-sighted and will only lead to making the very problem they are trying to solve—housing affordability—significantly worse. Our July Quarterly Survey of Apartment Market Conditions found that some members are beginning to consider (or already have) stopping investment in places where rent control either has been enacted or is being considered.”
Prices going up
In the single-family home market, home price increases are moderating—according to S&P’s Case-Shiller data released in September, single-family home prices across the nation were up 3.2 percent in July, the same as in June. Still, the numbers hit a cycle peak in 2019.
“Part of the reason why home prices are so high is that we have seen very limited additions to the inventory,” said Sam Chandan, dean of NYU’s Schack Institute of Real Estate & founder of Chandan Economics. “There’s very little single-family homes construction. In fact, when we look at housing stock now, while it has recovered significantly from the financial crisis, the levels are still what we would normally see at the weakest point in the cycle.” Chandan also points out that starter homes, meant for the first-time homebuyer, have been particularly neglected by developers.
Prices for both single-family and multifamily homes are likely to move up even further due to high construction costs, the labor shortage, a lack of resale inventory, as well as regulations. A study conducted by NMHC and NAHB found that regulations (land use laws, fees, lengthy approval processes, etc.) account for 32.1 percent of development costs and, in a quarter of cases, that number can be as high as 42.6 percent. According to research by Statista for the last quarter of 2018, 43 percent of renters say they do not own a home because they cannot afford one.
“We have high prices because supply is constrained. There has been very little new inventory that’s come online, so while prices are high, the underlying conditions are very different from what they were before the financial crisis,” Chandan said.
Housing bubble? More like housing trouble
A type of housing bubble that kicked off the last economic downturn will most likely not come to pass this time around. The affordable housing shortage, the misalignment of rents and wages, lower cost of mortgages, and inefficient government policies, however, might shake up the market. “Zoning for higher density housing in more suburban locations is going to be a major debate and at the local and state level, a major election issue as we enter this cycle. We’ve seen many communities are very opposed to higher density housing in their neighborhoods,” Chandan added.
The key issue going forward will not be an artificially pumped mortgage system, but an economic slowdown that needs to be carefully managed. “Housing demand this cycle is supported primarily by employment growth and household formation, and not by poor mortgage underwriting standards. So, I don’t see a housing bubble, but at some point, employment growth and household formation will slow, as will housing demand,” concluded Scott Koppelman, senior vice president of Development in Seattle for AMLI Residential. Seattle is one of the few cities that have approved upzoning regulations to create 6,000 new rent and income-restricted homes for low-income residents.
A $10,000 cap on the deductibility of state and local taxes, a lower limit on the amount of mortgage debt on which interest is deductible, and lower marginal tax rates have negatively impacted the housing market. (In a follow-up post, our colleagues will provide empirical evidence that reaches this same conclusion. Unfortunately, neither analysis will estimate exactly how much of the recent slowing is due to higher interest rates versus changes in tax law).