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Home prices continue climb as pandemic and work-from-home shift how people live

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Danielle Hale, chief economist at Realtor.com, explains what's driving house prices even higher.

Video Transcript

[MUSIC PLAYING]

- So, a lot of people are wondering, what's coming next for the housing market? Let's try and figure that out with Danielle Hale, realtor.com's chief economist. It's good to have you here. And we should point out that we've brought you in as part of our series looking at the state of home buying, which is brought to you by Veterans United home loans.

In fact, before we jump into the fact that, look, we've seen double digit increases over 2/3 of the country for housing. For veterans, because it is Veterans Day, what programs exist that are helping veterans deal with the increase in new homes and buying homes?

DANIELLE HALE: Well, veterans have programs that are only available to veterans that are really unique when it comes to mortgage lending options. It enables them to put down as little as 0%. And in addition to the loan down payment option, which can help people get their foot in the door since saving up for a down payment is one of the big challenges that buyers, especially first time buyers, face, the loan also has some other criteria that are put in place to protect buyers and help them make good decisions as they buy a home.

- Danielle, I guess give us your assessment of the housing market right now, because we've seen prices continue to trend higher. We're waiting to see a little bit of a break in this momentum to the upside. It doesn't seem like anything is stopping it any time soon. What's your view, just in terms of what we could expect in the coming months?

DANIELLE HALE: So, in the coming months, we're in the historically slower season for the housing market. So, as we move towards the end of the year, people get ready for the holidays and take their mind off of the housing market and tend to pull back a bit on the home selling and home searching. That said, because of all that we've seen, thanks to the pandemic and low mortgage rates, buyers are still very active.

So, it's a seasonally slower period, but a more active winter season than we usually see, and that's helping to keep prices high. They're down just slightly from summer's peak at $380,000, according to our October housing data. And so, that continues to be a challenge for buyers in the market, but for buyers who have been looking for a while, you're going to find much better conditions now than you did, say, earlier in the year in the spring or the summer when the housing market is really at its most competitive.

- When you look at some of the increases though, for instance, Austin, Texas up 32.5%, Las Vegas, 27.2%, and they don't even have any water, Tampa at 21.8%, Orlando up 20%, Denver up over 18%. You hear some people say, it's got to be a bubble. And yet, the analysts say, this is nothing like what we experienced in 2006, '07, and '08. Why not?

DANIELLE HALE: Yeah. So, the fundamental factors are really different this time around, leading into the what's been known as a bubble years. Builders are really ramping up construction and meeting with demand that was driven, in many ways, by lending practices that are very different than today. We've had a lot of regulatory reform. So, the way that people go about getting loans and are underwritten, that has changed very dramatically. And so, that's kept too much leverage from beating into the system and pushing home prices up in an unsustainable way.

That said, we are seeing a massive shift in the way people are choosing to live, and spend their time, and deciding where to locate in the wake of the pandemic, and that has caused some markets to really win, and you highlighted a lot of those winners in the South and in the West, especially areas that have benefited from an influx of tech workers who have flexibility to work anywhere and are taking advantage of that.

And those incoming workers are driving up home prices because builders just can't keep up fast enough. The shifts in the way that people want to live have been very rapid in response to the pandemic, and that's created some of these tensions. The market solves this imbalance of supply and demand by pushing up prices, and that's what we're seeing in some of these markets.

- Hey, Danielle, when do you expect that imbalance to be corrected? The fact that so many builders just simply cannot meet demand. We've been talking about that now for quite some time. When are we going to see a little bit of a more equal playing field, just in terms of the supply that's out there meeting what people want to buy at this point?

DANIELLE HALE: Yes. So, let me give builders some credit now. They're doing what they can. Single family housing starts are up above one million this year and have been for the last couple of years, for the first time in almost 13 years, so going back to 2007.

So, builders are really trying to ramp up, and they're doing a decent job of it. It's just such a big problem, because we had so many years of under building that we've got a really big hole to dig out of. Estimates vary, but our report suggests that we're undersupplied in the housing market to the tune of 5.2 million homes. That means over the last decade, household formation has outpaced single family home building by 5.2 million homes.

It's a really big hole to dig out of. We're making progress, but it's probably going to be with us for the next five to six years, even if builders continue building at this elevated pace and we see a somewhat slower pace of household formation that we've seen in the last couple of years. So, this is a problem that's not going away anytime soon.

- And hearing that number, a lot of people are probably getting very fearful about how do they ever get into the market. What happens too, whether it's the middle of next year or 2023, when the Federal Reserve starts raising interest rates and mortgage rates start going up?

DANIELLE HALE: Yeah, when mortgage rates go up, that does make it more difficult for people to get into the housing market, particularly first-time buyers or entry-level buyers who tend to take on larger loans to get their foot in the door, because they don't have large down payments. So, any time you start to see mortgage rates move up, that does change the calculation. It's going to make home buying a bit more expensive.

That said, mortgage rates are still very historically low. And so, that's helping keep those costs more manageable than we would otherwise see with prices as high as they are. So, I think as long as the Fed does a good job of telegraphing its intentions, what it seems to be doing so far, we see a gradual adjustment in mortgage rates, that shouldn't be too disruptive to the housing market.

The thing we want to watch out for is what we saw in the wake of the 2013 taper, when people weren't doing a great job of anticipating what the Fed was going to do, and it caught people by surprise, and mortgage rates moved up very suddenly, very quickly. That's the type of thing that can really derail buyer plans.

- Danielle Hale is the chief economist at realtor.com. Thank you so much.