Why are home prices going up? The common wisdom suggests that lots of demand coupled with a lack of supply are at the heart of recent price increases, but what if demand is less robust than widely believed? And what if supply is likely to grow? It could mean a very different year in 2022 for real estate investors as well as homebuyers in general.
There is surely an argument to be made that new home sales are doing well. Lawrence Yun, chief economist with the National Association of Realtors (NAR), said in October that “new home construction fell modestly, 1.6% in September from the prior month, but the year-to-date activity is solidly higher by 17% compared to 2020 and by 23% compared to the pre-pandemic year of 2019. More housing inventory will therefore steadily emerge.”
But, as they say on Wall Street, “past performance is no guarantee of future results,” a concept that surely applies to the pandemic economy. Can the new home market be slowing?
That may be the case. Dennis McGill, Director of Research at Zelman & Associates, says we now have more new homes in the pipeline than at anytime in decades. Meanwhile, the demand surge seen earlier in the pandemic may be moderating, thus leading to oversupply.
A tale of two markets
We essentially have two housing markets, one for existing homes and one for new construction.
The supply-and-demand trends that work for one market may be different for the other. Complicating matters is the reality that for nearly two years we’ve been in the midst of a pandemic economy, a time of massive government spending, huge employment shifts, and a financial environment that’s unlikely to be continued or repeated.
The price gap...
