Home prices in the U.S. continue to rise and this presents a bit of a conundrum for market analysts. Normally, low unemployment and increasing wages would be fueling an increase in housing prices.
The coronavirus pandemic, however, caused unemployment to shoot up and has hobbled the incomes of many Americans. This has created an unusual dynamic, said Suzanne Mistretta, a senior director for Fitch Ratings, one of the three major bond-rating agencies in the U.S.
“It defies all of what we know and understand in terms of underlying fundamentals supporting the housing market,” Mistretta said.
The agency views home prices as overvalued by 10% or more in one-quarter of the country’s metropolitan areas. The most overvalued cities are Las Vegas and Austin, each of which are overvalued by 24%, according to Fitch Ratings. Mistretta spoke to Scotsman Guide about these and other housing issues.
What do you expect we’ll see with housing in 2021?
We think prices are going to continue to rise, and that’s primarily driven by the supply-and-demand imbalance that we’ve been observing. [It] was present even pre-pandemic in the mid-to-low price tiers. The pandemic has made it worse.
We think if the lockdowns continue that there’s going to be an extension in forbearance and foreclosure moratoriums. That will continue to keep housing off the market. If the economy recovers and those borrowers that were permanently affected by the lockdowns have to liquidate, then that will put inventory back on the market.
Are there other ways to increase the supply of housing?
The housing starts are increasing. They’re now at 2007 levels, about 1.3 million starts (in August 2020). They’re still way below the historical average of 1.5 million, but it’s getting there. The homeownership rate is approaching the 2008 level of about 67%, almost 68%.
Why has the homeownership rate increased so much?
You have the workers in industries that are unaffected by the pandemic and can work remotely. They want to buy a house. They want to get out of the city. There’s a deurbanization trend — either it’s because of the virus, or the crime or the schools. It’s a mass exodus out of the cities into the suburbs. Remote working is a complete game changer. [There are] all of these people who stayed in the city because they had a five-day-in-the-office workweek and they didn’t want to commute. If you’re commuting an hour and a half, even two hours, you could do that three days a week.
Home prices can only go so high. Incomes are only so elastic before they become inelastic.
How will the pandemic affect the housing market in 2021?
The inventory is going to remain tight. Those workers who are in industries [in which] they’re confident that they’ll be keeping their job are going to continue to look for homes outside of the cities. Supply is not meeting demand. Houses are going off as soon as they come on the market there. You have a 3% mortgage rate. As long as rates are that low, people are going to go out and buy.
One thing that I’d say to watch is affordability. Home prices can only go so high. Incomes are only so elastic before they become inelastic. The one thing I think that will rein in prices is affordability, but with the 3% mortgage rate, a lot of houses are affordable.
What do you expect from the Biden administration with regard to housing?
It’ll depend on what happens with the (Federal Housing Administration) and it will depend on what happens with the (Consumer Financial Protection Bureau). If the directors of both have a different agenda and strategy than the current directors, then I think you’re going to see a potential change. ●