The housing market is off to a sluggish start as the spring sales season arrives. In Monday’s WSJ, I wrote about an unexpected culprit: rising home prices.
That rising home prices are the latest trial for U.S. housing markets might sound a little odd. After all, policy makers have spent much of the last six years trying to break a vicious downdraft in prices, and few predicted that home prices would rise as rapidly as they have once they hit bottom.
Home prices turned up beginning two years ago as more buyers chased a shrinking supply of homes. Falling mortgage rates initially allowed Americans to swallow rising prices because their monthly ownership cost was mostly unchanged.
But that ended last summer, when mortgage rates shot up by a full percentage point. Now, buyers faced a one-two hit of higher rates on top of higher prices. Investors, meanwhile, pulled back because higher prices meant there were fewer bargains.
Demand has cooled in markets such as Phoenix and Las Vegas where prices have jumped sharply over the past two years, even though they’re still well below their 2006 peaks. And the rate at which prices are rising in parts of Southern California appears to have slowed.
Of course, there are other explanations for declining sales volumes. In some parts of the country, such as San Francisco and Minneapolis, real-estate agents say there simply aren’t enough homes for sale. Buyers can’t purchase homes if sellers aren’t making them available—an issue that the WSJ explored in greater depth last month.
And it’s possible that the winter storms of the past few months may have also curbed buyers’ home browsing. If that’s the case, then the answer to the “what-role-did-weather-play” question will be answered as soon as the spring arrives.
Housing bulls tend to cite low inventory and poor weather for the recent softness. But housing bears say that the housing market is much weaker than recent price gains would suggest because many average Americans aren’t able or willing to purchase homes, due to a combination of weak incomes, higher debt loads, and stricter mortgage-credit rules.
If reduced inventory is holding back sales, it would help to see home builders ramp up construction. (My colleague, Conor Dougherty, takes a look at how apartment construction now accounts for the highest share of new-home building in at least four decades.) For now, single-family home builders have focused on selling more expensive homes, but it’s not clear how long that strategy will work—especially if interest rates continue to rise.
Even at the current level of demand, construction remains too low nationally, says Mark Zandi, chief economist at Moody’s Analytics. Within a year, he says, housing markets will be “undersupplied” if construction doesn’t pick up, and within two years, it will be “significantly undersupplied.”
For the last 10 years, housing has been anything but normal. So was it ever realistic to expect a “normal” housing recovery? Probably not.