When You Restrict the Supply, the Inevitable Happens

When You Restrict the Supply, the Inevitable Happens

When you restrict the supply, the inevitable happens: “Home values rose faster than ever in 2021. The median sales price for an existing home was $346,900, up a whopping 17% from the prior year,” says KIOS.

But for those who already own the roof over their head, the typical American homeowner saw a gain of $50,200 in home equity in just a single year.

When You Restrict the Supply, the Inevitable Happens

“The price increase is a record,” says Lawrence Yun, the chief economist for the National Association of Realtors, which just came out with the news. He adds that the rise in home values is “even stronger than the days of subprime lending.”

Yun refers to the ruinous lending practices that fueled the housing bubble and led to the financial crisis 15 years ago. Back then, prices were artificially boosted because people were paying more than they could afford. But Yun says reforms put in place by Congress since then ensure that people can afford the home loans they get. So something very different is happening now.

“We are facing a major housing shortage,” Yun says. “In December, we saw record low inventory, an all-time low, and there are simply not enough homes available for sale.”

Meanwhile, during the pandemic, millions of people working from home have wanted more space and have been trying to buy homes. Record low supply, coupled with strong demand, has pushed prices up quickly and dramatically. But Yun expects price gains to moderate this year, perhaps around 4% to 5%.

“The price gains will begin to normalize,” he says. “And people should not anticipate another year of this double-digit rate of appreciation.”

Still, the housing market will remain out of balance as long as the supply of homes is constricted. After the financial crisis, many homebuilders went out of business, and for a decade, the builders that were left did not build enough homes, given population growth.

Estimates are that the U.S. is short several million homes. And building more won’t happen overnight.

What Could Go Wrong with Yun’s Forecast?

Inflation is roaring to the most significant price gains in forty years. The Fed is expected to raise interest rates five times in the next year and a half to fight inflation. With a stock market in a major decline and a slowing economy, investors are already hedging their bets. According to ZeroHedge, “One clue comes from the Fed Funds market, where traders as a result of the rout in risk assets, believe there is no way the Fed will be able to execute its stated intention of hiking four times in 2022. The market-implied number of Fed Fund hikes by Dec 2022 is now decidedly below four (4) for the first time since Jan 14.”

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