What’s With the Pandemic Housing Market?

What’s making housing prices rise in the midst of tough economic conditions?
October 14, 2020 Updated: October 14, 2020

Commentary

The economy is recovering—and may continue to grow if it’s allowed—but that doesn’t explain why housing prices remain at record highs for much of the country.

After more than 30 million people found themselves suddenly out of work this past spring due to the CCP virus pandemic, even though jobs have rebounded—adding almost 1.4 million jobs in August—at 7.9 percent, unemployment still remains relatively high.

The Inventory Factor

What’s more, wages have fallen in many sectors while remaining unreasonably high at $15 an hour in states such as California, inhibiting recovery in the nation’s most populous and richest state.

And currently, 3.6 million homeowners are several months behind on their mortgage payments.

Why haven’t housing prices fallen along with the salaries and financial losses of millions of mortgage holders?

That’s the question economists are trying to figure out, but the main factor is, in a word, “inventory.”

But demand for housing is dependent upon inventory of both buyers and sellers. At the moment, there are more buyers than sellers in the most desirable areas.

Delayed Housing Market Downturn?

Granted, support from the government helped soften the blow of the job losses. But after months of paycheck support, today, 18 million people no longer receive their extra $600-a-week boost to their unemployment check.

And although banks have been giving struggling homeowners loan forbearance for the past six months, that forbearance period is about to end.

That means millions of people have blown through their savings, are behind on their mortgage, and either don’t have a job or have taken a pay cut.

Given the difficulties mentioned above and the overall tough job market, surely there should be less demand in the housing market when more people have less money and fewer jobs?

Plus, with millions of houses likely to fall into foreclosure, potentially flooding the market as forbearance ends, shouldn’t housing prices be falling now or very soon?

That may well happen; just not yet.

Housing Market Behaving Like Stocks?

In some ways, a brief look at the buoyant stock market can help us more easily understand why the housing market is behaving as it is.

Stocks are high because of stimulus cash from the Federal Reserve, stock buybacks from companies, and the fact that there are fewer listed stocks today—about 50 percent less than there were just a few years ago.

So there’s more money chasing a lower inventory of good stocks. Note that fundamental valuations aren’t key to this analysis because they’re not the factors driving prices skyward.

A similar dynamic is occurring in the housing market. Demand may not be growing as much as it was before, but due to the pandemic shutdown, housing starts are way behind the curve.

Desirable Inventory Supply Problem

As a result, the supply of houses in desirable areas is shrinking, effectively raising demand and putting upward pressure on prices.

A big part of that is the falling supply of desirable housing.

The economic conditions and pandemic policies of certain states have impacted the desirability of living there. Some states have been hit harder than others by the pandemic and the economic fallout from a state’s response to it.

In some cases, high taxes have also played a role, adding additional financial strain on business owners and homeowners. In other states, it has been a combination of the two.

New York, for example, meets both of those criteria. It was hit hard by the virus with a high infection fatality rate, and has been on lockdown longer than most. It also charges high taxes to its people and businesses. Its hesitance to reopen has also hurt.

As a result, businesses have been shuttered and people are fleeing the state. That’s why New York state is mostly a buyers’ market for houses.

On the flip side, more desirable places such as Florida and Texas are seeing housing prices rise. Both states are low tax states, business friendly, and are reopening.

California, however, in terms of its pandemic lockdown duration, high taxes, and a high-regulation business environment, resembles New York more than it does Texas or Florida. And, like New York, California is seeing an exodus of residents and businesses. But unlike New York, California real estate prices remain high.

Pre-Pandemic Housing Shortage

The difference with California is that even though people and businesses are fleeing the state, housing supply remains very thin, at least while buyers with sufficient financial resources are still plentiful. California’s housing shortage began well before the pandemic, due in large part to the state’s anti-business regulations, including expensive and difficult construction regulations and rent control, which both stifle homebuilding.

Thus, by severely limiting homebuilding over the past decade, California has created a huge housing deficit in a very desirable location. Therefore, until enough people leave the state, the available housing inventory in California will remain low.

At the national level, until banks begin to demand mortgage payments from late borrowers, the housing market in California and other desirable states such as Texas, Tennessee, and Florida will continue to see rising prices.

But when the market turns, it could turn very, very quickly.

James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.