Manic Housing Market Needs a Calming Dose of Deregulation

The U.S. housing market is on fire, with the supply of available homes falling drastically short of pandemic-stoked demand. Worrywarts are calling it a “crisis” and circulating weird tales of buyer desperation — including one about a supplicant in Bethesda, Maryland who apparently offered to name her first-born child after a seller — and warnings of stunted recoveries. Or maybe the thing to fear is another speculative bubble, like the one that set off the 2008 global financial crisis.

The better way to think about the hot market is more prosaic: Demand for houses is booming as the pandemic recedes, and supply can’t keep up because of both temporary and longer-term factors.

Short-term causes notwithstanding, the imbalance is likely to persist. So states and localities should use it as an opportunity to rethink regulations that make it harder to expand the supply of housing.  

Data released last Tuesday show that housing prices are soaring, growing by 13.2% for the year ending in March, according to the S&P CoreLogic Case-Shiller Home Price Index. That represents the biggest increase since December 2005. My colleagues at the American Enterprise Institute Housing Center report similar growth, 12.6%, and find that prices grew rapidly for both low-cost and high-cost housing. Each of the 40 largest metro areas experienced price growth of at least 7% in March relative to one year ago, with prices in Phoenix and Austin rising by over 16%.

Demand for housing is booming. According to a National Association of Realtors survey, there were an average of five offers made for every home sold in April. Houses stayed on the market that month by a median 17 days, down from 27 the previous year. New home sales are at their highest levels since 2007, and sales of existing homes are up, too.

Many factors are at work. Household balance sheets are in great shape thanks to the various economic stimulus measures passed over the past 14 months. While mortgage rates have risen, they are still near historic lows, fueling home purchases in spite of higher prices. The average interest rate on a 30-year mortgage loan is around 3%.

The pandemic continues to affect the types of houses people want to buy. The National Association of Realtors survey reports that 60% of agents have buyers looking for work-from-home features like a home office, finished basement and more square feet. In November, Redfin reported that demand for second homes doubled relative to the previous year.

Surging demand is meeting limited supply. The share of houses that are unoccupied and on the market is at its lowest level since the 1970s. Another measure of supply asks how many months it would take to exhaust the inventory of existing homes for sale if the current sales pace keeps up. In a buyer’s market, it takes more than six months. In March, the AEI Housing Center reports that there were just 3.5 months of supply.

Pandemic-related safety protocols have slowed down the time it takes to build houses in some states. The surging price of lumber, another pandemic-related phenomenon, has also made it difficult to build. So has difficulty finding construction workers. Construction job vacancies were up 14 percent in March relative to February 2020, the month before the pandemic began. In April, construction-sector average wages grew at a 12.6% annual rate as employers hiked up pay to attract and retain scarce workers.

But housing-supply shortages can’t all be blamed on Covid-19. The main reasons for them predate the pandemic. It takes too long in many parts of the U.S. to secure building permits due to increasingly onerous regulatory requirements. Land-use restrictions and zoning regulations mean that too little land is available for residential housing.

Will strong demand continue? Almost surely, despite the likelihood of a higher interest rate policy at the Federal Reserve. As the millennial generation continues to age into peak homeownership years, more Americans will enter the housing market.

Some supply constraints will ease as social distancing restrictions are lifted, the economy normalizes after a bizarre year and policies that expanded unemployment benefits, which are keeping workers on the sidelines, expire. But it takes awhile for new houses to be built, and housing-related regulations are the more important factor in restricting supply growth.

So prices are sure to stay high. And current soaring prices will be baked into future prices. Household income won’t rise nearly as fast, making it harder for low-income Americans to purchase homes.

It’s not a crisis, but it is a serious issue.

To address it, policy makers should focus on the root of the problem: supply. Soaring home prices can be an opportunity to take on the entrenched interests that make it so difficult to roll back land-use, zoning and permit-related regulations, freeing up land and making it easier and less costly to build houses. More houses mean lower prices.

The path to affordable housing lies with deregulation.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”

©2021 Bloomberg L.P.

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