The housing market is blowing up – but Americans are starting to wonder if the high prices are inflating another housing bubble, set to burst and send the economy into a tailspin akin to the Great Recession of 2007.
It is an understandable point of view. When home prices are growing faster than incomes, ultimately that is an unsustainable trend. And even the most optimistic forecasts do not see current prices lasting.
But worries of a major price crash are probably unfounded. The circumstances contributing to today’s booming market are very different from what precipitated the last “boom-and-bust” cycle.
Today’s mortgage companies are far more fastidious, generally offering loans to borrowers with overall higher credit scores. As such, the demand seen the in the housing market today is much more organic, built on a growing demographic wave of prime-aged, well-qualified home shoppers.
The biggest problem in today’s market is one of shockingly low inventory, and unfortunately, a lack of new homes to fill it.
Like easy lending, rampant speculative home building mostly went away after the Housing Crisis bubble burst. Home builders who got caught up in the 2007 frenzy and overbuilt ended up with a whole lot of homes they could not sell, and therefore bills they could not pay. The inability to sell excess product is especially problematic when the product you are selling is so expensive.
Now builders are conscientious to construct only as much as they’ll need, leaving them completely caught off guard by the pandemic surge. Demand for lumber sent prices skyrocketing just as they try to catch up.
Adding fuel to the fire is a 40-year war over lumber between the U.S. and Canada, exacerbated during President Trump’s administration. The U.S. Commerce Department recently reduced a 20% tariff to 9%, but that added cost still hits consumers hard.
In February, the National Association of Home Builders (NAHB) estimated that lumber prices were adding $24,000 to the average purchase price of a new home. By April, the NAHB upped that number to $36,000.
While it takes some time for home prices to adjust to lumber prices, the good news is that lumber prices may be topping out soon.
With inventories still low, 2022 might be a repeat of 2021, with lumber prices again pushing new home prices higher.
The spillover of higher lumber prices may also exacerbate partisan disagreements over the path to fixing America’s crumbling infrastructure. Wood plays a critical part in laying concrete.