Watch a preview of Carl Icahn’s video, to be released Tuesday, in which he warns of an asset bubble due to low interest rates.
In the midst of a raging pandemic, with millions of Americans still out of work and facing the possibility of eviction and foreclosure, the United States is experiencing a real estate boom the likes of which it hasn’t seen in 15 years.
Home prices are rising practically everywhere. From Augusta, Maine, to Phoenix, Arizona, and from Sarasota, Florida, to Aberdeen, Washington, prices are up by double digits.
Driven by historically low interest rates that make borrowing cheap and waves of people fleeing densely populated cities because of COVID-19, home buying has become as competitive as it was during the boom years of the mid-2000s.
Homes for sale have dwindled
Supplies of existing dwellings have dwindled far below the six-month level considered normal. Realtors are receiving multiple offers. Builders can’t keep up with demand and flipping is back.
Talk of a housing bubble is now common among analysts – including those at Swiss banking giant UBS, who back up their claims with charts showing how home prices are outstripping both wages and rents. While home prices have appreciated more than 60% since November 2012, incomes have only appreciated by 20% and rents by 30% over the same time period. The upshot: Homes are out of reach for more and more buyers every year, the analysts argue.
But unlike the real estate boom that led to the Great Recession, this nationwide price spike is not being fueled by a wholesale collapse in lender ethics. There aren’t any low-doc or no-doc loans to be had and borrowers are having to do much more than fog a mirror to get funding.
Supply and demand fundamentals can also fuel rising prices.
“For over a decade, we’ve had a chronic lack of supply of housing,” said Marco Santarelli, chief executive of Norada Real Estate Investments in Laguna Niguel, Calif. “We need 1.62 million units a year to keep pace with organic demand, but we produce significantly less. We’re about 370,000 units short each year.”
Santarelli added that the supply imbalance will only get worse as more than 140 million millennials and members of Gen Z move into rental units and starter homes in the years ahead.
“About 52% of young adults from 18 to 29 are still living with their parents,” Santarelli said. “That’s the highest rate in over 110 years. These people have to go somewhere and that’s why I’m so bullish about real estate over the long term.”.
An out-of-balance housing market
But these healthy fundamentals don’t mean there aren’t worrying distortions in the market.
With the Federal Reserve continuing to buy Treasury bonds and other securities under its quantitative easing program, interest rates are being held artificially low as dollars are being pumped into the economy. That makes borrowing cheap and encourages investors to buy riskier assets like stocks and real estate, driving prices of those assets ever higher.
Until the Federal Reserve halts its bond buying and interest rates begin to rise again, real estate prices will continue to climb, says Robert Goldman, a real estate agent with Michael Saunders & Co. in Sarasota. And no change in policy is expected any time soon.
“The Fed will keep buying bonds far into the future despite what could be a booming economy in 2021 and 2022,” Goldman said in his monthly newsletter.
“We had a 10.2% increase in home prices in Sarasota in 2020,” Goldman told USA TODAY. “What I’m concerned about is that prices will continue to appreciate at 10% to 15% a year and that’s not sustainable.”
At a certain point, interest rates will rise and there won’t be enough buyers coming in from more expensive markets to keep paying the higher prices. Either development, or both, could lead to a pullback in prices.
The moratoriums on evictions and foreclosures are also distorting the market. There’s no question these policies are needed to keep people from being displaced in the midst of a pandemic, but they will eventually have to be lifted and it is not clear what will happen when they do.
Santarelli is confident the damage will be minimal. He…