A recent article in the Wall Street Journal stated – “The House Party May Be Winding Down”. Their concern? That rising interest rates coupled with continuing double digit price appreciation could stall a housing market that has been charging at a bullish rate for the past decade, long exceeding previous run-ups. In fact-mortgage interest rates, currently flirting with the 4% mark, are at their highest point since a brief spike in 2019, up over 1% from their sub-3% territory just a year ago. With the Fed promising to start raising their overnight rates as early as June, even higher interest rates will likely follow. Home prices nationwide are reaching new peaks and prices in Southwest County are again up more than 20% over last year (a median price home in Temecula would set you back $720,000 last month, $650,000 in Murrieta). The concern is not misplaced.
But is the concern enough to tip the balance and lead to a market ‘correction’ or even a full-blown route? The forces driving current demand make that highly unlikely. Three elements continue to shape that force and those remain unchanged.
- Redefined demand: The pandemic reshaped many Americans’ views about housing, driving a push toward more suburban lifestyles with less dense housing and larger homes to accommodate the new residence/workplace/education balance. Our region has benefitted greatly from those shifting goals as our affordability and life amenities attract buyers eager to experience cleaner air, lower crime, fewer onerous regulations and restrictions, and an overall higher quality of life. As those patterns of work-from-home/educate-from-home continue even after a return to a more ‘normal’ post-pandemic environment, the increased demand for accommodating homes will remain.
- Millennial surge: After a decade of forecasting that the ‘millennial surge’ is just around the corner, it appears to have arrived. As we are aware, the millennial contingent represents a larger, and in some ways more prosperous, demographic than the baby boomer generation and their entry into the market has been a much-anticipated event.
But millennials have been later to marry and slower to form households than prior generations. Over the years that has led some prognosticators to claim millennials didn’t want to own houses, that they would be forever content dwelling in downtown high-rise apartments and didn’t want to move to ‘the country’. Surprise! That’s not true, they’re just taking their time. When questioned, most still aspire to the dream of home ownership, with a yard for their puppies and a place to build a swing set for the kids to play on. Can’t do those things in a city high-rise. Plus, many have used the time living in their parent’s basement (that’s a hackneyed phrase since Californian’s by and large don’t have basements) to save the money needed for a down payment on a home. This millennial surge will continue for at least the rest of this decade, if not longer, and their demand for housing will remain.
- Supply constraints: Housing supply continues to play a major role in the demand curve. As I’ve pointed out in this column for years, California has simply not built enough homes in the last decade since the 2009-2012 recession to meet demand. In fact, we’ve built less than half the residential structures, both single and multi-family, needed. It’s probably a good thing the state has experienced a mass exodus of residents over the past few-years, or the problem would be even worse. But that exodus, combined with rising demand in other regions, has produced a housing shortage that now extends from sea to shining sea. Supply chain issues, rapidly escalating costs for lumber and materials, and a shortage of labor have exacerbated the problem. California has compounded these problems with onerous regulatory policies, CEQA delays, ‘green’ requirements and other practices that have dramatically reduced our ability to build homes at all, but especially ‘affordable’ homes for our workers, our veteran and our children. Supply has fallen so far behind demand it will be at least a generation before we achieve some sort of parity, and it will not happen unless land use, labor, and building policies change.
Finally, we could experience an even bigger short-term run-up in demand. Real estate guru Bruce Norris has tracked buyers-habits going back to the ‘50’s and promotes a contrarian theory that as interest rates rise, more people jump into the market. With rates dependably low for so long, there was no sense of urgency but as they sense that brass ring potentially getting out of reach, the fence sitters will be driven to action. Especially as rent increases make the buying equation even more attractive.
So, unless demand falls dramatically in-spite of every indication it will increase, or supply magically increases in spite of every indication it will not, look for the housing market to remain strong for the foreseeable. We may see some moderation to the pace of sales and maybe (hopefully) some slowing to the double-digit price increases, but what you see today will likely be what you see going forward with one caveat:
Never discount the ability of our government to totally screw things up and send the whole shebang sideways.