FAU Economist: Few Markets, if Any, to Avoid U.S. Housing Crisis

By Paul Owers | 05/18/2022

Tags: Finance | Press-Releases | Real-Estate
Categories: Faculty/Staff | Research

Solutions Include Supply-Demand Balance, Helping Builders Manage Risk

Housing Costs

The following is an analysis of the U.S. housing and rental markets by Ken H. Johnson , Ph.D., an economist in Florida Atlantic University’s College of Business

Home values and monthly rents follow cycles built around long-term trends. Typically, these fluctuations aren’t dramatic – particularly so in rents. But we are in a period now in which both home prices and rents are significantly above their respective long-term trends.

So what happens next? In short, millions of Americans should prepare for major repercussions.

From late 2017 to late 2020, both home prices and rents held closely to their long-term trends with little deviation. While both were rising, they were rising slowly. Increases were generally viewed as reasonable and manageable.

With the onset of the pandemic in 2020, two factors – near-record-low mortgage rates and the willingness of buyers to buy properties virtually – played major roles in the rapid run-up in home prices.

During the same period, the federal government placed a national moratorium on rental evictions, resulting in a stall in rental rates. During 2020, in fact, rentals in most of the country were undervalued because they were leasing below the long-term trend. But the expiration of the moratorium combined with strong demand for rentals, particularly in Florida, sent rental rates soaring.

Housing Costs

These factors have greatly contributed to pushing the U.S. home and rental markets into a crisis stage. Many think this will unfold like the last downturn of 2006 to 2012, with home prices falling universally across the country. But this seems unlikely, given that recent shifts in population and the nationwide shortage of units to rent and own are also contributing factors, unlike during the previous downturn.

However, a reckoning is due. Home prices and rents can’t separate as significantly as they have from their long-term fundamental trends without major issues arising in the marketplace. Few markets, if any, will escape unscathed.

Areas of the country with persistent inventory shortages and increases in population, such as Florida, Texas and parts of the Northwest, likely won’t see significant declines in home values and rental rates. At the same time, those areas will face a prolonged housing affordability crisis. And until more rental units are built, landlords will continue to raise rates, pricing out many middle-class consumers who previously turned to renting because they couldn’t afford to buy. This will contribute to local worker shortage issues.

Conversely, communities that lose population while finding a better balance of supply and demand almost certainly will experience deep losses in home values and sluggish rental rates from which it will take several years to recover. But the silver lining is that homes and rentals in those areas will be much more affordable. Those metros are likely to include Detroit; Memphis, Tennessee; and Youngstown, Ohio.

How do we get back to more stable markets for both homes and rentals? It’s a straightforward answer.

When for-sale and rental markets regain and maintain a balance between supply and demand, housing stability will return. Toward that end, local governments should consider making accessible public dashboards showing such items as building permits started; current and expected populations; where properties are to be located; units completed; and which units are proposed as rentals and which are proposed for ownership.

That would help developers decide where and when to build. Take these uncertainties away from developers, and we should more easily attain a balance between supply and demand.

Until that point, imbalances between units supplied and units demanded will cause either prolonged periods of unaffordability in for-sale and rental housing or spans of time during which family wealth will be damaged by dramatic slumps in prices.