Pricing, inventory stabilization anticipated
By: J. David Chapman/August 4, 2022
The last two years have seen multiple market trends dictating the direction of the housing market in the U.S. First, due to the COVID-19 pandemic, people were moving out of big cities and buying homes in the suburbs. This was primarily due to a wave of work-from-home arrangements, social distancing, and the affordability of the rural markets. Second, the construction of new homes slowed down to historic levels as the cost of construction materials increased. It came as a result of restrictions on imports and increased shipping costs. Third, mortgage interest rates were extremely low, and foreclosures were almost nonexistent. This is also a by-product of the pandemic due to laws and regulations to make life easier for homeowners and buyers who lost their jobs and were struggling financially.
Many are nervous today about the economy and wondering about real estate going forward. The causes of the current conditions are listed above, let’s consider what it looks like going forward.
Working from home is declining and many have returned to their workplaces. However, some will not. This will cause the move from the cities to reduce, but suburbs will still remain popular choices for those able to work from home – even if in a hybrid arrangement.
As mentioned above, the inventory shortages have been the biggest hindrance to home buyers in the real estate market in the past two years. At the end of last year, the inventory was down by almost 27% compared to the same period in 2020. The drastic increase in property prices can be attributed to shrinking inventory, coupled with the significant increase in demand during the pandemic era. This will stabilize. Inventory will increase and demand will shrink to pre-pandemic levels – still good, but not crazy. Prices will stabilize along with the increased inventory and reduced demand.
Stabilization of prices is good for the industry and communities. The problem is the prices are likely to stabilize at a level beyond the affordability of many, and the increase in inventory will be on product that the majority of citizens cannot afford. Without increases in family incomes, and continued interest rate hikes, it is likely that the product being built and the neighborhoods being developed will do little to solve the affordability issues and shortage of housing we are currently experiencing.
J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).