Reviews | Post-Covid relocations to cheaper cities hurt residents
When Covid-19 first struck, those of us in the real estate industry predicted a housing market collapse. In the first two months of the pandemic, 22.4 million Americans lost their jobs, while gross domestic product fell at the fastest rate in modern history in the second quarter. Instead, what has happened is a transformation of the housing market, fueled by what I call the ‘migration mania’.
For employees in many industries, working remotely during the pandemic effectively detached them from their physical offices. Historically, but even more so during the pandemic, people with high-income jobs are the most likely to work from home, McKinsey & Company found. As a result, many of them chose to leave the more expensive areas of the country for less expensive subways.
This emergence of buyers moving to lower cost markets, coupled with low interest rates, limited housing supply, investors looking to make money on the housing recovery, and home buyers. houses caught in the excitement, means rising house prices. In the existing market, which accounts for the bulk of total home sales, prices are up 24% nationally from prices in May of last year, according to the National Association of Realtors.
But this is not an equal opportunity boom. The real estate rebound has been fueled by buyers whose wealth has enabled them to win bidding wars often with a high down payment and a bid above asking price. Those who live on local incomes, which are often modest compared to those of newcomers, lose the opportunity to buy a home as competition intensifies and prices rise. In the long run, this means that some Americans will be able to build wealth in their homes, leaving the rest behind.
At the start of the pandemic, buyer confidence collapsed. Sales slowed in March 2020 and by May total transactions were down 24% from the start of the year. Yet May marked the trough in home sales: Spring 2020 ended with the biggest real estate boom in more than a decade, helping hundreds of thousands of Americans get back to work. After being locked in for months, consumers have jumped into the market to find their dream home, much to the delight of builders and realtors.
In the summer of 2020, it became clear that demand for housing was far outstripping supply, causing prices to skyrocket. In 2019, the median selling price of a home increased 4.9% from 2018 levels; in the last six months of 2020, it had jumped to 13.4%, according to the association of realtors.
Soon, crazy stories started popping up all over the country: homes selling for hundreds of thousands of dollars above asking price, two-year waiting lists, real estate agents running live auctions, people camping for days for the chance to buy a new home despite not knowing its price. This frenzy is reminiscent of the real estate boom of the mid-2000s – and that, understandably, worries people.
But today’s market is different. This boom is not motivated by the lack of credit and speculative loans. In fact, homebuyers are financially strong today, with 73% of this year’s first quarter mortgages going to those with a credit score of 760 or more, up from 64% last year. . Beyond good credit scores, buyers today have healthy debt ratios and wealth through a combination of savings, home equity, investments, and generational transfer.
At the same time, rapidly rising home prices are leaving some potential buyers priced out, perhaps forever. Those who can’t afford a large down payment or who don’t have a good credit rating have been less able to climb the ownership ladder – let alone access it – a vital part of wealth building. .
The gap between the haves and have-nots is particularly pronounced in places swept away by the frenzy of relocations. Phoenix, for example, had the highest positive net immigration according to the latest data from the US Census Bureau. Phoenix real estate attracts those who live in Los Angeles – and for good reason. Those moving from Southern California to Phoenix can find a similar home for half the price in the new location. The average size of a new home in Phoenix is 2,500 square feet, at an average price of $ 505,800, according to Zonda; the equivalent home in Los Angeles costs an average of $ 1.15 million.
Due to the influx, house prices in Phoenix are about 20% above last year’s levels, compared to just a 3.2% increase in local incomes.
So while Phoenix’s relative affordability allows buyers in the more expensive markets to drive up local home prices, it drives out local buyers.
The same trend is taking place in other large and growing markets like Austin, Texas, and Tampa, Florida, but also in smaller markets. Home prices in Salisbury, Md., Went from 3% growth between May 2019 and May 2020 to 15% growth between May 2020 and May 2021. Boise, Idaho, a strong market before the pandemic, increased by 11% between May 2019 and May 2020 against 36% between May 2020 and May 2021.
All of this to say: Relocation buyers have and will continue to fundamentally change the housing landscape across the country. The agglomeration of high income earners is likely to be accompanied by a permanent shift to more expensive housing, a problem that will be exacerbated as mortgage rates rise.
To give residents at risk of being billed in these relocation centers a chance to own property, authorities should encourage development near public transport, convert underutilized commercial real estate into housing, and boost construction. more affordable housing through tax incentives. Builders and developers should focus on low cost homes. Buyers should be prepared to accept a smaller home or a more densely populated area for an affordable price. And lenders should expand access to mortgages without repeating the loose lending mistakes of the last real estate boom.
Ultimately, looser zoning rules, better funding to recruit and train construction workers, and a pro-housing policy will help prevent large numbers of Americans from being permanently excluded from home ownership. property.
Ali Wolf is Zonda’s chief economist. She is the creator of Zonda’s proprietary indices, including the New Home Pending Sales Index and the New Home Lot Supply Index.
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