Somehow, the entire housing market is managing to explode.
Rents and house prices have risen dramatically. Houses are staying on the market for less and less time. And it’s harder to build new ones, since materials and laborers necessary to build them have been rendered expensive and scarce. This all seems to be happening almost everywhere in the country, even in places that saw a substantial number of residents leave in the spring and summer of 2020.
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“The market is going crazy everywhere, everywhere is getting more expensive,” Rob Warnock, a researcher at Apartment List, told Grid.
According to an analysis by Apartment List, the two hottest rental markets in the country in the past year were the Tampa Bay area in Florida, a prototypical Sun Belt state that has become a destination for people looking for more space, better weather and lower rents. But the largest rent increases? New York City, where rents declined by a fifth in 2020 and then rose by over 30 percent.
Realtor.com has estimated that’s there’s a 5.2 million-home shortfall in housing construction, not keeping pace with formation of new households. Researchers at Realtor.com came to this figure by looking at what demographers call household formations, which are groups of people living together and can be driven by population growth, children moving out of home, adults living as roommates or alone, and so on. They then compared the number of new households with the number of single-family homes being created and found the 5 million-plus gap. That’s only accelerated as many analysts argue that household formation has likely picked up.
“Overall household formation, we definitely think it’s been accelerating since early stages of the pandemic, considering how much growth we’ve seen in the price of for-sale homes as well as rentals,” Warnock said.
This leads to similar pressure on home prices and rents wherever the work-from-home exodus lands.
“The ability for people to work remotely has really led the way for people to move to the Tampa area,” Eric Hawkins, a Coldwell Banker real estate agent in Tampa told Grid in an email. “Of course, the great weather and a strong job market are always huge factors as well. As for affordability, for renters relocating from a market like New York, prices are relatively affordable, but with the rise in property values and rent over the last couple of years, it is starting to price some people out of the market.
Why are homes so expensive?
Though housing costs have been creeping up for years, Warnock attributed the seemingly sudden movement to two interrelated factors. People whose economic situation became more precarious saw the pandemic and the rise of remote work as a chance to move somewhere less expensive, while those with more economic security saw the pandemic as an opportunity to live somewhere that better fit their changed preferences for more opportunities to be outside and have more, cheaper space.
Much like how the dynamics of Americans’ ability to buy stuff instead of services has had dramatic effects on the prices of goods throughout the economy, so too has a shift in both how and where Americans want to live led to every market booming.
Paul Williams, a fellow at the Jain Family Institute, described the housing market as going through two distinct dynamics that have resulted in rising prices almost everywhere. There’s a “pan-geographic recovery,” where expensive markets like New York City are starting to see people move in after an exodus in the spring and summer of 2020, and a “geographic surge,” where areas that have large inflows of new residents can’t build enough new homes to keep prices from shooting up.
Hawkins, the Tampa-area real estate agent, described the result of new renters as a “trickle-down effect,” raising prices, keeping existing renters in their current leases and even deterring some from moving there.
“Demand continues to highly exceed supply. Eventually, the added inventory will allow the market to stabilize but it’s going to take some time.”
Williams looked at data from the U.S. Postal Service to see where people left and arrived, and the relationship with rents. Williams found a “mass exodus of places where rents were higher than average and massive inflow to where rents were lower than average,” and while typically smaller metropolitan areas had relatively large inflows, the big cities that saw arrivals were places like Atlanta, Houston, Dallas and Tampa.
“The pandemic gave people an excuse and an opportunity to get out of the over-demanded city and somewhere a little cheaper,” Williams said.
Similar factors can be seen all over the housing market, whether for apartments or single-family homes, rentals and purchases.
“What’s happening now in all types of housing is far more demand than supply. That’s leading to price and rent appreciation,” said Jay Parsons, head of economics and industry principals for RealPage. “What’s different this is time is that there’s been so much demand. It’s driven up price growth and rent growth much more than we’re used to seeing.”
Case study: Knoxville, Tennessee
Knoxville, Tennessee, and its surrounding area is one of those smaller, cheaper areas seeing an inflow, along with rising rents and home prices. According to Williams, the Knoxville area’s net migration tripled in the 18 months following February 2020 compared with the 18 months before. Since then, according to Realtor.com, the median sale price was around $210,000 in February 2020 and has since risen to almost $300,000, while the number of listings has declined.
The local housing market “took a huge leap forward and not really slowed down even two years in,” said Hancen Sale, government affairs and policy director for the Knoxville Area Association of Realtors. “Prices are growing faster [in Knoxville] than most places around the country.”
Sale told Grid that the Knoxville area, which is the third-largest metro area in Tennessee, recorded monthly record home sales for nine of 12 months in 2021. The area also saw the highest number of home sales in any single month ever in July 2020. According to their data, about 10,000 people moved to Knoxville in 2020 and it became one of the fastest-growing metros in the first half of last year, with about 4,000 to 5,000 new residents in 2021.
The reasoning is familiar for many areas that have seen substantial in-migration: lower cost of living, lower taxes (Tennessee does not have a state income tax) and, Sale said, “it’s a nice place to live, [there’s the] Great Smoky Mountains, a nice little valley.”
The rental market in Knoxville has been similarly affected. Rents grew a little over 5 percent a year in 2020, 2019 and 2018, according to Harvard University’s Joint Center for Housing Studies, but then grew over 17 percent in 2021.
This shifting relative preference for urban areas with more outdoor opportunities and nicer weather is not limited to East Tennessee. The combination of relative affordability and outdoor opportunities is what distinguished some of the hottest post-covid markets, according to Warnock of Apartment List. “Those are the markets that really blew up first and continued to blow up throughout the last 18 months or so. Affordability stood no shot in Reno, Tampa or Phoenix.”
Supply chain issues are hitting housing too
People can move far quicker than builders can build. Even in areas of the country that are more politically amenable to development, supply chain and labor difficulties can weigh on new housing construction.
“We, like every other housing market in the country, we’re feeling the impact of the supply chain issues, the labor shortage, when I speak with homebuilders in the area, they’re feeling a lot of pressure,” Sale said. “If they wanted to build enough housing, they couldn’t.”
It’s not just in Knoxville. Homebuilding has become a locus for everything weird about the pandemic economy, from an accelerated change in consumption preferences to a supply chain that can’t keep up.
“Windows, I would tell you, generally, across the entire United States, are a pressure point. Paint is a pressure point. And appliances would be some things that I think are common across the entire enterprise. And then when you get into certain regions, things like siding become a pain point, depending on how much of that we use in the construction of our homes in those regions,” homebuilding company PulteGroup’s Chief Executive Officer Ryan Marshall said during an earnings call in October.
“Even faucets and washing machines and dishwashers cost more,” said George Ratiu, a senior economist at Realtor.com. “The pace of construction, while it’s increased, has not caught up with demand.”
While some of the supply shortfall can be attributed to a familiar litany of covid-era struggles for businesses — not enough workers, not enough stuff — some analysts say that the shortfall in homes people want to buy has been building up over the past decade, leaving the market ill-prepared for a sudden shock: people who all of a sudden can and want to move to a wider range of destinations, along with more people forming households.
“I don’t think you can point to any one specific barrier, but certainly both material and labor shortages caused a delay in construction over the past two years,”
But the only way for prices to moderate over time, Williams said, is to bring supply and demand into balance. “The way you address this is a supply response in places that had a demand response,” he said.
That means finding a way to build more homes — and fast.