As I have postulated in prior commentaries, the combination of demographics (Baby Boomers, Gen X and Millennials), historically low interest rates, the hyperbolic reaction from buyers due to pent up demand from the lockdown, and the paucity of sellers uncomfortable listing their homes due to mixed messaging, has led to home price inflation and bidding wars the likes of which we’ve never seen.
Here’s why I think we are seeing double-digit year over year growth. At the start of 2020 home sales were strong and growing, but still without sufficient supply to meet demand. The lockdown exacerbated this lack of supply. The current housing environment is partially the result of a bottleneck from the lockdown.
According to Black Knight, a highly regarded real estate and mortgage analytics company, the 25-year average for home price growth has been 3.9%. In 2019, there was slight slippage, but still 3.8% growth. In September 2020, Black Knight reported prices surged 14.2%, due to Fed induced super low interest rates, shortage of inventory and the lockdown. It was the largest yearly spike in more than 15 years. That makes me uncomfortable.
But I do not foresee a housing bubble. I see this as pretty much a one-off event, primarily due to the anomaly of the societal lockdown and the fear it fostered. As we resume “normal” activity, the pressure will ease. I believe by the 3rd quarter of this year we will begin to see the resumption of historical appreciation in the 4% range.
It is also why I have argued that the most important thing we can hope for is the continued rise in the yield of the 10-year Treasury, which most directly affects mortgage interest rates. At the close of 2020, the 10-year yield was less than 1%. That’s why interest rates were so low. Inflationary concerns have recently raised the yield to a 1.6% range. I would like to see it hit at least 2%. If it does, it should push mortgage interest rates to around 4%, high enough to taper off the inflationary pace of appreciation, but low enough to restore a 3 – 4% annual appreciation rate, and therein a more balanced market.
