Rent for single family homes soared to a 14-year high as the housing boom escalated in March

single family home rentals sale leasebacks
  • Rent prices soared 4.3% year-over-year in March to their highest since 2006, CoreLogic said.
  • The jump comes as potential homebuyers increasingly move into the rental market instead.
  • Rent prices are expected to climb over the next year, which could contribute to inflation remaining elevated.
  • See more stories on Insider’s business page.

The nationwide shortage of new homes lifted selling prices at their fastest-ever rate earlier this year. Now rent prices are following suit.

The cost of renting a single-family home in the US rose 4.3% year-over-year in March, CoreLogic said in a Tuesday release. That’s up from 3% in March 2020 and places rents at their highest level since September 2006.

Phoenix and Tucson led the increase, with prices rising 11.4% and 10.4%, respectively. Atlanta, Las Vegas, and Charlotte followed close behind. Prices for higher-priced homes jumped 5% and drove the bulk of the acceleration. Lower-priced and lower-middle priced homes saw the weakest rent inflation.

Boston saw a nearly 8% decline in rent prices through March. Prices also fell in Chicago and St. Louis, according to the report.

The US housing market has been on a tear over the past year as outsize demand overwhelmed the national supply. Inventory tumbled to record lows earlier in 2021, and while construction has picked up somewhat, a still-elevated sales rate threatens to accelerate price inflation even further.

Surging home prices often drive potential buyers to the rental market; a recent CoreLogic survey showed nearly 70% of consumers citing high home inflation as a reason to rent. But even that option is growing crowded, and burgeoning demand for rentals risks creating a new affordability problem. More than one-third of consumers said rentals in their neighborhood were either not very or not-at-all affordable, CoreLogic said.

Rent’s potential effect on inflation

Soaring rent prices also risk keeping inflation persistently higher. Shelter inflation – which tracks rent prices and owners’ equivalent rents – is only just picking up as buyers pivot to the rental market. Rent inflation is a critical component of broad price growth, as it represents “more cyclical, more persistent, and more inertial sources of price pressures,” Morgan Stanley economists said in a note.

A continued run-up in rent prices could lead nationwide inflation to normalize above 2%, the bank added. That would counter the Federal Reserve’s forecasts for strong-but-transitory inflation that stabilizes at 2%.

Other economic data released this week suggests homebuilders aren’t rushing to address the historic inventory shortage. Housing starts tumbled more than expected in April, cutting into the 20% jump seen in March. Elevated lumber prices and a decline in construction workers likely weighed on the sector. Permits for new residential units edged higher, but the amount of permitted construction that hasn’t yet been started reached its highest level since 1979.

The slowdown comes as the US boasts a monthly home supply of just 3.6 months, just above the record-low of 3.5. After years of underbuilding, strained supply stands to drive price growth even higher as the US economy rebounds.

Economists will get their next glimpse of the housing-market boom on Friday when the government publishes data for existing home sales in April. Contract closings are expected to hold steady at an annualized rate of about 6 million.

Read the original article on Business Insider

5 warning signs in the real-estate market that recall the mid-2000s housing bubble

housing
  • Several gauges of housing market activity mirror trends seen just before the bubble burst in 2008.
  • Experts see the current boom as far safer than the prior rally, citing stronger lending requirements.
  • Still, here are trends ranging from home prices to construction activity that resemble 2005 and 2006.
  • See more stories on Insider’s business page.

Housing-market monitors keep repeating the phrase “since 2005,” except when it’s “since 2006.” That’s worrying – both superlatives refer back to the peak of a historic real-estate bubble.

Low mortgage rates and massive demand have powered a supercharged rally for US housing over the last year. Americans snapped up nearly all the available supply of new and previously owned homes amid huge population shifts from cities to suburbs. Chronic underbuilding after the financial crisis left contractors struggling to meet the new demand with adequate supply. That imbalance has since pushed selling prices skyhigh.

The boom’s frenetic nature has led many to compare the current market with that seen just before the infamous 2008 crash. Experts have been quick to note that, while some similarities exist, the latest price surge has more to do with a lack of inventory than dubious lending standards.

“I don’t see the kind of financial stability concerns that really do reside around the housing sector,” Federal Reserve Chair Jerome Powell said last month. “We don’t see bad loans and unsustainable prices and that kind of thing.”

But just because the market looks different on a macro level doesn’t mean there aren’t strong similarities to the period just before the bubble burst. Here are five housing-market signals flashing the same signs seen about 15 years ago.

(1) CoreLogic Home Price Index

Possibly the most basic indicator of just how much demand has outstripped supply is nationwide price indexes.

The headline price gauge for housing-data authority CoreLogic soared 11.3% year-over-year in March, according to a Tuesday report. That marks an acceleration from the February rate of 10.4% and the fastest rate of price growth since March 2006. On a month-over-month basis, prices rose 2% from their February levels.

The financial analytics firm sees that momentum cooling over the next year. A persistent wearing-away of home affordability will likely curtail some purchases, and accelerated construction will shore up supply in the months ahead, CoreLogic said. Still, year-over-year price growth should reach 3.5% as lingering demand keeps the rally alive, Frank Martell, the president and CEO of CoreLogic, said in a statement.

“With prospective buyers continuing to be motivated by historically low mortgage rates, we anticipate sustained demand in the summer and early fall,” he said.

(2) S&P CoreLogic Case-Shiller Index

Separately, a more city-focused measure of home-price inflation notched a similar reading last week. Home prices in metropolitan areas gained 12% year-over-year in February, according to the S&P CoreLogic Case-Shiller Home Price Index, the headline index of US home prices for more than three decades. The reading signals the strongest price growth since 2006 and edged slightly higher from the prior annual gain of 11.2%.

Inflation was broad-based. All 20 cities saw home prices climb, and 19 cities saw year-over-year price growth accelerate from January to February. Prices rose the most in Phoenix, San Diego, and Seattle, according to S&P.

(3) Selling prices for new vs. previously owned homes

Digging deeper into home sales reveals an unusual phenomenon unseen since the previous boom. For the first time since 2005, Americans spent more on previously owned single-family homes than on new construction, according to March housing data from the Census Bureau and the National Association of Realtors.

The dynamic signals Americans are prioritizing buying any available home instead of hunting down a new unit.

To be sure, monthly sales data is volatile and the premium for new homes could reemerge in April data. But with supply still under pressure and CoreLogic’s Tuesday report showing prices broadly climbing higher last month, the phenomenon might linger for some time.

(4) Home starts

As gauges of market demand soar to 15-year highs, so have measures of upcoming supply. Housing starts surged nearly 20% in March as contractors rushed to address the lack of new homes for sale. The leap places the annual rate of starts at its highest since 2006 and serves as the largest month-over-month gain since 1990. Permits for new residential construction also increased, albeit at a slower rate.

The rebound was somewhat prompted by winter storms curbing construction activity in February. But for the most part, a historic shortage of available homes fueled the pickup in building. Just 1.07 million existing homes were up for sale in March. That sum, at the current purchase rate, would be snapped up in only two months.

Homebuying has slowed from its pandemic-era peak, giving contractors slightly more time to meet the elevated demand. With millennials hitting peak homebuying age and lumber prices expected to decline, some economists see the rebound in construction paving the way for more moderate price growth.

(5) Home equity take-out

The sustained acceleration of home price growth has also lead owners to take out equity at the same rate seen in the mid-2000s. Homeowners refinancing their mortgages pulled roughly $50 billion in equity out of their homes throughout the fourth quarter of 2020, according to data from Freddie Mac and the Urban Institute.

Mortgage rates, while still at historically low levels, reversed their pandemic-era decline through the first quarter as investors braced for the economic recovery to give way to higher borrowing costs. Those higher rates erased the rate-reduction incentive for refinancing, making equity take-out the top reason to refinance, the Urban Institute said in a report published April 27.

Although equity take-out on its own is normal, the sharp uptick seen last year could be cause for concern. Some economists have criticized the Fed’s ultra-accommodative policy for encouraging risk-taking across various markets. Increased equity take-out presents new financial risks for participating homeowners since a decline in home prices from their skyhigh levels could cut deeply into their balance sheets.

And while equity take-out sits at its 2005 level, it is still well below the 2006 peak. Yet with mortgage rates expected to climb over the next few years, take-out refinancing could accelerate further.

Read the original article on Business Insider

The housing market is the hottest it’s been since right before the 2008 crash – but there’s far less bubble risk this time around

buying home
  • Home price growth and construction are the hottest they’ve been since 2006 – the peak of a housing bubble.
  • Despite the similarities of some housing data from 15 years ago to today, experts see two very different markets.
  • Conditions driving this market boom are “fundamentally, radically different,” an economist told Insider.
  • See more stories on Insider’s business page.

Housing data is hitting levels unseen since 2006 in at least three different ways, begging the question of whether this is another bubble. Experts say this isn’t that – it’s economics.

Another housing bubble 15 years after the last one would be very bad news, as the epic pop of that market in 2008 threatened the stability of the entire global financial system. But while today’s price inflation is similar to then, the drivers behind this market rally look different.

Nationwide home prices grew 12% year-over-year – their fastest pace since 2006 – this past February, according to the S&P CoreLogic Case-Shiller Index. Gains were broad-based, with all 20 cities tracked by the index experiencing price growth above their respective median levels.

Separately, CoreLogic’s own home-price index also recorded the highest annual leap since 2006 in February. That gauge tracks home prices across the country, while S&P’s index measures prices in 20 metropolitan areas.

Also, for the first time since 2005, the median sale price for previously owned single-family homes is higher than that for new construction. In other words, the premium Americans typically pay to be the first to live in a new house has been completely erased as homebuyers have rushed to buy any home on the market.

“The conditions underlying what happened way back then, during the bubble of ’05 and ’06, and what’s driving price growth today are just fundamentally, radically different,” Frank Nothaft, chief economist for CoreLogic, told Insider.

Where dubious lending and market euphoria powered the mid-2000s surge, today’s boom is almost entirely due to a nationwide supply shortage. The monthly supply of homes sits near record lows of about 3 months, leading sellers to demand increasingly large sums for their properties. That compares to more than 12 months of supply in 2009.

Today’s market is also backed by a strong underwriting process and isn’t engulfed in a subprime mortgage crisis, Nothaft explained. The price growth we are currently experiencing, he continued, “is rooted in economics.”

Record low mortgage rates and the heightened focus on space have sent buyer demand through the roof, but a pullback from prospective sellers and a lack of newbuilds have resulted in a national decline in homes for sale.

“When you put all these pieces together, increase in demand and limited supply, it pushes prices up and that’s what we’re seeing in the marketplace,” Nothaft added.

Learning from post-crisis mistakes

Other gauges aren’t just at their hottest levels since 2006, but their hottest levels full-stop. The median selling price for existing homes touched a record high of $329,100 in March, according to the National Association of Realtors. And though the supply of previously owned homes has edged higher in recent months, it’s still close to February’s all-time low of 1.03 million units.

“We’ve been underbuilding for years,” Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR), told Insider.

The shortage can be traced back to that 2008 housing crash and its long-term fallout. The buying frenzy seen throughout the 2000s had fueled a boom in new construction as builders rushed to meet unprecedented demand. But once the bubble burst, contractors pulled back on building in an effort to prop up demand. Construction rebounded slowly through the last decade, leaving the market with diminished inventories once the pandemic-era boom began.

Daryl Fairweather, chief economist at Redfin, told Insider that the last decade saw a massive drop-off in homebuilding. Fewer homes were built by a factor of 20 going all the way back to the 1960s, she said.

But the latest data suggests contractors are finally heeding the market’s call. Home starts leaped nearly 20% last month to the highest level since, you guessed it, 2006. The reading also marks the largest month-over-month increase since 1990, underscoring the urgency faced by homebuilders.

Americans also seem prepared to keep the market boom alive for at least a while longer. The share of consumers planning to buy a home in the next six months rose to 8.9% in April from 8.1%, according to The Conference Board’s Consumer Confidence Index. That’s the highest proportion since 1987.

With millennials reaching peak homebuying age, supply bouncing back, and mortgage rates expected to move up slightly, economists don’t expect the housing rally to pop, but instead settle into more sustainable growth.

“I think we will return more to the trend that we were seeing pre-pandemic,” Nothaft said, which showed steady national price growth in the single digits. In February 2020, home prices increased by 4.1% year-over-year.

For millennials, who are entering or at peak homebuying age, that would represent a return to a pre-pandemic dynamic of record low mortgage rates but a housing market that still felt out of reach. It may not be a bubble, but it isn’t exactly attainable, either.

Read the original article on Business Insider