Despite the recession, total U.S. personal income was $500 billion HIGHER in August than in March due to the $4 trillion in federal Covid relief grants and loans that went to businesses, individuals, and governments.
Did you know that real disposable personal income in the U.S. actually increased because of the federal response to the pandemic? I didn’t. It sure helps explain the skyrocketing house prices.
I was blaming the sharp house price increases on the Fed’s lower interest rates and, secondarily, on people wanting larger houses indoors and out. But I was still puzzled. This third factor seems hugely important to me.
Obviously, if you worked in tourism, hospitality or travel, you’re hurting. But that increase in U.S. disposable personal income is going somewhere, and that, no doubt, explains some of the increase in the demand for houses.
I learned about this yesterday from this interview of David Rosenberg. He’s a bit of a permabear but I think he makes a great point.
Personal Income vs. GDP
You can see on the graph that GDP tanked due to Covid but personal income skyrocketed at the same time due to the government response. Although falling fast, personal income is still a lot higher than it was before Covid.
We’ll get GDP numbers for the 3rd quarter at the end of October. Many expect to see large increases in GDP growth for the 3rd quarter. That will be important because, as you can see, the impact of Covid relief programs on personal income is fading.
Personal Income vs. Unemployment
Here’s another view of the effect. Unemployment skyrocketed but so did personal income.
Real Estate Mania Factors
The way I’m looking at the housing market is that we have 3 big factors driving the market.
1. Lower Interest Rates
Changes in interest rates have an impact for a long, long time. I’ve seen studies that say the impact can last 3 years. Let’s say lower rates have a diminishing impact over at least 2 years. That’s a tailwind for house sales and price until 2022.
What I don’t know, exactly, is how fast lower interest rates will be capitalized into higher house prices and how fast the impact of lower interest rates fades over those 2-3 years.
2. Changes in Housing Demand
The longer it lasts, the longer Covid will be changing what people want in a house. It seems work-from-home has already become a lot more deeply ingrained into the system.
Certainly, the suburbs of big cities will see more demand – if you only have to commute into work 2 or 3 times a week, living further away from work is fine. In addition, more jobs will be full-time work-from-home so those folks can live pretty much anywhere.
What I don’t exactly know is how strong this change in housing demand will be and how it will play out. We know the general direction but we don’t know how far it will go.
Overall, this factor will probably have the longest impact on housing demand.
3. Impact of Covid Relief
If the increase in personal income has had a big impact on the housing mania, that opens up a whole new area of uncertainty. You have to predict political responses… arghh. You have to predict how the impacts of the earlier programs fade over time.
Overall, this factor will probably have the shortest impact on housing demand which, if true, would make it the most important factor to watch.
Real Monthly Mortgage Payment Price
Here’s the graph again from last week that’s from my national market website, Real Estate Decoded. It’s shows there’s room for house prices to increase.
For U.S. real estate market analysis,
go to Real Estate Decoded.
New Listings
Approaching 2019 numbers.
For Sale
Still crazy low.
Under Contract
Very high. Part of this is caused by overwhelmed title and mortgage systems which are taking longer to close but part of it is also because of a high number of closings.
Solds
September closed sales were running 10% to 30% higher for single-family houses than during the same weeks in 2019.
Tell me in the “Comments” what you think.
This information can vary a lot in different parts of metro Phoenix. Your real estate agent can find the data for your specific city or zip code at The Cromford Report.
Note. This post was written on October 11, 2020 but the graphs will be continually updated.
12 Responses to The Shocking Reason House Prices are Increasing So Fast
I enjoy reading your analysis of the real estate market because I also have a real estate and economics background.
Things I’ve concluded from working in real estate during Covid:
1) $50K in purchase price means a lot to a seller but it’s just the cost of a month’s Starbucks coffee habit to a buyer.
2) People with nice incomes who were content paying rent would never have considered buying in the next 5 years but for Covid.
3) PreCovid-nobody had time or wanted to devote time to looking for a house in their leisure time. Working from home affords them time to look for a house while working, or they have more leisure time since they are no longer commuting.
All are additional reasons that more demand is in play and pricing are going higher. It looks like the economy may be pulling out of the previously perceived nosedive and only certain groups are going to come out of this scarred economically. Most of those may not have ever considered buying or been in position to buy.
Still, so many unknowns with the political uncertainties and how state and local governments are going to go up getting their budgets up again.
*Home prices not “pricing”
Kevin, I was just thinking about #3 the other day! Working at home saves at least an hour a day driving. 90 minutes is probably more commn. There’s a cost associated with learning about how to buy a house and searching for a home. Maybe people who were thinking about buying someday, had when working at home & they could to move buying a home up on their to-do list. If that’s the case, we would be working our way through those buyers and they should taper off after a while. Another reason might be having the kids at home – it increases the need for more space inside and out. The increase in demand is a lot stronger in the $500,000+ market so that might suggest vacation homes or people moving up their plans to buy future retirement homes. If you got any ideas about why $500,000+ would be so much stronger (sales numbers up 92%) than $0-$500,000 (sales numbers up 6%).
John, Fascinating & I think it makes a lot of sense. Had heard dollar value of transactions was higher this year than last & wasn’t sure how. My guess before your article was that more sales are happening due to high income families leaving cities – New York, San Francisco, etc.
PS I recently disputed a ridiculously low appraisal & wrote this article about a lazy appraiser who refused to acknowledge higher value for one-story house … https://hometipsforwomen.com/build-one-story-house
Nice piece! You really dove into the differences between 1-story and 2-story homes. I sometimes get owners of 2-story homes pricing their houses per square foot and think the house is worth a lot more than it is. They don’t like hearing the 2-stories sell for less per square foot than 1-stories in the same neighborhood.
While personal income has increased for many people due to Covid19 stimulus money, that has certainly given a boost to the economy and helped certain businesses such as furniture stores, home improvement and many others.
However, that does not explain the rise in house prices as many of those same people would not qualify for mortgages. It may well be that the people who are now working from home have more time to house hunt and are needing a bigger house have increased the demand, and therefore the prices though., but if that is the case it does not explain why smaller houses have increased in price at a far greater percentage than have the bigger ones.
It is a crazy and unpredictable market and we have lived in the Greater Phoenix area for 50 years and seen nothing like this.
Phil, That’s interesting! Kevin, in an earlier comment, mentioned that same thing about more time to house hunt. Maybe I should think that through.
And that’s a cool mystery – the percentage increase in price is higher for lower-priced homes but the percentage increase in sales is higher for higher-priced homes.
As far as the impact of the increase in real disposable personal income, I don’t have the mechanism figured out. I just know that money is going to someone, somewhere, somehow and it may be an important factor in the increase in demand for houses.
Great comment! Thanks. Let me know if you see move evidence of the “house hunt” idea. Buyers need to be able to afford the house but they also need to be able to afford to spend the time to learn about and buy a house.
It would be good to know the breakdown between investor and first time buyer purchases. I have a feeling that many institutional buyers are also driving the real estate prices up
ashish, I saw something about institutional buyers recently in The Cromford Report. I think it was inconclusive. I’ll check it out tomorrow.
ashish, According to The Cromford Report, only 1.2% of all single-family houses in metro Phoenix are owned by institutional investors. It’s tricky to estimate the total number of non-institutional single-family rentals because people may not want to say it’s a rental because property taxes are higher. Any, the Cromford Report best estimate is 225,000 to 250,000 single-family homes are being used as rentals (long-term or short-term). I don’t know the first time buyer number. However, with the eviction moratoriums, I suspect a lot of landlords aren’t too happy with their rental income although they’re probably thrilled with the equity appreciation. So I don’t THINK institutional buyers would be in the market because of the eviction moratoriums. I do worry, however, that we might see a wave of investors moving money out of the stock market and into residential real estate because of potential for better returns, at least if you extrapolate out recent returns.
John, as usual great post. You are the best at breaking down and analyzing the data.
THANKS! I really appreciate your comment!
Comments are closed.