Today, Explained - The bonkers housing market

Episode Date: May 3, 2021

Is it a bubble? Is it going to pop? Do you need to bid over asking? Has it already sold? Are there any houses left? Will you ever find one? Vox’s Jerusalem Demsas explains. Transcript at vox.com/todayexplained. Learn more about your ad choices. Visit megaphone.fm/adchoices Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Hey, my name is Jordy calling from... Raleigh, North Carolina. Sacramento, California. I'm calling from Baltimore, a small town in eastern Washington state called Pullman. And my wife and I have been trying to buy a house literally anywhere. Everything is ridiculously overpriced. And there's just I don't see how we're going to be able to buy a house before our lease is up at our current apartment. And we have no idea what we're going to do. I think we put in probably eight offers on homes. There were 12 offers on the house that we ended up getting,

and we had to go almost 10,000 over asking. I have received cold calls from people trying to buy my property. I've had two friends trying to buy houses in the Austin area, and they are being outbid by people who are usually bidding and getting houses at $80,000 over the list price. My husband and I are both in our mid-30s, and we both make each over $100,000 a year, and we cannot afford a home. We don't regret buying the house, but we were pretty beaten down. It seems like every step along the way with the housing prices going up in California and me having more and more costs and shutdowns due to the pandemic.

It's just been a wild uphill battle. So help us out. Help us understand why nobody can buy a house in Austin anymore. How do we know that this isn't the top of the market? And yeah, hope you guys can explain it all in a way that can fix the problem. Thanks. All right, so the housing market in the United States is bonkers right now. It's actually the most bonkers it's ever been. It's really, really, really wild.

Vox policy reporter Jerusalem Demsys has been reporting on it. Right now, housing prices, the median housing price in America is around $350,000. A year ago in March, it was at $300,000. So that's one of the most craziest appreciations in house prices that we've seen in the United States. Real estate brokerage Redfin calls March the hottest month in housing history, with a record 43% of homes selling for more than their listing price. And for a lot of people, this is great news. And for a lot of people, this is turning into a real problem.

It's a really big problem. We're also seeing the supply of homes is at a record low. The Urban Institute, which is a think tank in Washington, D.C., does a report where they attract the supply of existing homes. And what they found is, you know, we've dipped below two months supply. So what that means is if there were no new homes on the market in two months, we would completely run out of homes to sell in the United States. That's the leanest supply on record. And there are now nearly two million working real estate agents as more got into the business during the pandemic. So

people are scrambling to find homes. There are so many anecdotes about all cash offers. There are so many anecdotes about people waiving inspection fees, even buying houses without ever having set foot in them. And it's all kind of a reflection of just how crazy the competition is right now. Where are all these houses being sold? All over the country, houses are being sold at a higher rate than we've seen in a long time, whether you're in suburban America, rural America, or urban America. The hottest markets that were happening pre-pandemic, places like the Phoenix suburbs or the Austin suburbs,

because they're warm, because they're more affordable than other cities, those have continued to be the hottest markets during the pandemic. One of the hottest real estate markets in the nation right now is Austin, Texas. Home prices there are up more than 18% in the last year amid an influx of tech workers from Silicon Valley and other parts of California. What we've also seen is that people have been moving into the suburbs of the places they were already living in. So if you're someone who lived in San Francisco, maybe you move to an exurb of San Francisco or maybe another city within California. But very few people made major moves outside of their own state. And what's extra wild about this, which you've alluded to a few times now, is that this is all happening during a pandemic when you'd think

people would maybe be trying to avoid going to random houses or when people have really been struggling economically. How do we reconcile these sort of opposing phenomena? I think it's something that's been talked about a lot during COVID-19. It's just the differential impact on lower income and higher income Americans. And this is something that is called the K-shaped recovery. And it's nowhere more apparent than in housing, where you have higher income folks who are able to take advantage of low interest rates and low mortgage rates to be able to buy homes. And lower income Americans are obviously not able to take advantage of this at all and are actually facing higher rents than they usually were. The pandemic has stretched many Minnesota families financially as they cope with losing

jobs and paychecks. The state has a moratorium on evictions, but struggling neighbors in one community learned there is no restriction on raising rent. I need to decrease something, you know, maybe I decrease food or lower my heat or, you know, something. So what's happening with COVID is that you're having essentially all these people who are able to work remotely are now able to accelerate the moves that they already wanted to make, whether it was more time to look for a house or they have more money because the stock market's been doing so well. They're able to make that move. And then that's not happening at the other end of the income ladder. So the pandemic is to blame here. I ladder. So the pandemic is to blame here. I wouldn't say the pandemic is to blame here. It exacerbated. Let's blame the pandemic. Come on. Well, I think what's happening is it's exacerbating existing trends. America's been

really, really bad at building enough homes for a long time. Over the last decade, we've built fewer homes than at any other point since the 1960s. But also, you know, you're right, the pandemic has changed some things in that people are less willing to have people come to see their homes because they're afraid of catching a deadly virus. So there are just fewer homes on the market. But that's clearly not the biggest problem here. The biggest problem has more to do with the fact that we're not building enough in the places that people want to live, in high demand locations like DC or New York,

Boston, L.A., San Francisco. We don't have enough homes, and that's causing people to compete for a fewer amount of properties. Abhinav and Moshika Guha first started looking at homes in November. They've placed seven offers and been outbid every single time. So they're looking at every possible way to sweeten the deal. We're 49er season ticket holders, so we've included 49er season, not one game. A game of your choice for 2021 regular season. We just did that this morning. Why don't we have enough houses in all these places that people really want to live? So local governments control whether houses can be built and where they can be built. That's what we call zoning requirements. So you can limit things to only allowing to have single family homes. You can say every house has to have

at least 10,000 square feet or a whole acre. And what that ends up doing is that it constrains the supply of housing. So if you have one acre of land and you say you're only allowed to build one house on it, that only houses one family. And that leaves four or five other families that were bidding for that house still looking for a property. Another thing that's actually constraining supply of houses is that as the market tries to keep up and build more homes, lumber is actually way too expensive right now. Like we're out of lumber? We're not out of lumber, but we don't have enough. A lumber shortage is bringing sticker shock to people building a home or improving the one they have. It's also increasing the price of that new fence or deck that you're hoping for.

The way that economists measure this is this term called a thousand board feet of lumber. So it's just a standard unit of measurement. And what we've seen over the last year, since about May of last year, is that the cost of a thousand board feet of lumber has actually gone up by nearly five times. And it's rising every single day. There are a few reasons for this. Similarly to the housing market, it's both a demand and a supply issue. One, we went into the pandemic, everyone had these DIY projects they wanted to do. They had these renovations they wanted done. So the demand kind of skyrocketed. And of course, millennials entered the market to buy homes right before and during COVID. That created a much higher demand as well for new construction for new homes.

But there's also a supply problem. There's actually a really great article in The Atlantic written by Robinson Meyer. Friend of the show. Which talked about these beetles, which essentially have decimated a bunch of the sellable pine in Canada. You can make an analogy to cancer. When someone's sick and the cancer is spreading, sometimes you need to amputate in order to stop the spread. And that's sort of what we're doing here. And we get a lot of our lumber from Canada. So what's happening up there is really relevant to housing prices here. So blame Canada.

No, blame climate change actually is the lesson here. Okay, but also millennials. Yes, they're always to blame. Thinking back to the first time millennials got crushed by the economy, this was, of course, during the Great Recession. It's like the last time America was really wrapped up in some real wild real estate frenzy too love in the club was on the radio people were really into big yellow h2s and motorola razor flip phones i feel like we only had three fast and furious movies then and like ben diesel wasn't even the star of two of them. I don't have friends. I got family.

And the economy totally collapsed in a recession driven by junkie mortgages. Is this something that we might be in for again right now? So because it was the most recent market crash that had to do with housing. A lot of people are scared of repeating history, but the fundamentals are completely different from what's happened in the Great Recession and what's happening now. Obviously, in the Great Recession, we had a lot of people who were not able to pay back their mortgages. Right now, credit standards are so tight and the competition is so high. The only people who are able to buy homes are people who are way overqualified to be able to actually get a mortgage.

So only if you have really great credit are you able to qualify for a mortgage right now. A lot of banks are reeling still from the losses in the Great Recession, so they're not willing to take a chance on people with lower credit scores. And of course, during the Great Recession, the Federal Reserve was less willing to bring down interest rates. And we don't see that happening right now with the Federal Reserve. They're much more willing to engage in that kind of monetary policy if there were to be a crash. But the fundamentals are just so different here. I don't think people should be worried about that

sort of response. Okay, fair. So we're not at risk of the same kind of bubble collapse as last time, but we are at risk of, it sounds like, just widening disparity between the haves and have nots. Who's really winning and losing here? So if you were able to take advantage of the mortgage rates, that probably means you have higher credit than the average American and you are wealthier than the average American or you have a higher income. And for people who were already homeowners, $1 trillion in home equity was actually gained between September 2019 and September 2020. So yeah, they're the big winners here, people who were homeowners and people who were able to buy a home and lock in a really low mortgage rate. My name is Wendy and I work for a big banking corporation and I work from home and I'm from Des Moines, Iowa.

At the beginning of the pandemic, I did not by any means think that I would be purchasing a home by the end of the year. But just as things kind of like escalated, I started really thinking about it and I was looking at how great the interest rates were and I had decent credit that had been building up over the years. And so I thought it the perfect time. The low interest rates combined with a good credit history and made it so that I was able to get a very decent interest rate with a lower interest mortgage payment that actually averaged less than what the rents for a one-bedroom apartment is averaging in my city.

The losers is everyone else outside of this exclusive club. People who wanted to buy a home and were priced out of the market, people who are in jobs that weren't able to sustain them through the pandemic are losing here. And a lot of renters are losing here as well. Hi, my name is Brandon Lovers. I live in Raleigh, North Carolina. So I'm a restaurant manager. My husband works in retail. We wanted to buy a house because we're going to keep paying this exorbitant rent. Rent's just going to keep going up. We don't have a lot of safety and closing costs. We've been trying to pay down our student loans to try and get our credit scores up. And then we spoke to our realtor and they kind of burst a little

bubble that we had. So we wanted to buy a house. We wanted to put down roots and settle down. And we're realizing that that might not be an option and it's going to be very, very difficult. How to keep that American dream alive for everyone in a minute on Today Explained. Thank you. to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp. You can go to ramp.com slash explained, ramp.com slash explained,

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Ontario only. Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge bet mgm operates pursuant to an operating agreement with i gaming ontario drussel i don't know about you but when i got a job at vox back in 2017 they were like you gotta move to dc and i was like cool cool cool. What if I did it from New York? And they were like, no, you got to move to D.C. But now when we hire people like my boy Miles Bryan, who's producing this episode, they're like, do it from wherever, do it from

Jupiter. I feel like remote work is, you know, probably going to be a lot more a part of our lives post pandemic. Will that make it easier for people to live in places where homes are more affordable, like, I don't know, southwestern Missouri or something? So it really depends on how widespread remote work remains. There's a National Bureau of Economic Research report that found about 37% of American jobs can be conducted remotely. Whether they will be is a whole other story. Of those jobs, they're concentrated amongst higher income workers. So this is, again, is another story where people who have been able to take advantage of remote work are on the higher end of the income

ladder. So that's one thing to note. For people who are able to work remotely, it does open up a lot of possibilities for them. Right now, over the last year, very few people were like, oh, you know, my job said I could be remote for seven months, so I'm going to move 10 states over. But if you knew from your job that you were going to be remote permanently, you might choose to move to a whole new state to be closer to family or other friends. But one thing to note here also is people don't just move to big cities or to the place where their job is simply because of their job. A lot of the times they want to live in the place that they're living in or at least someplace similar. So, you know, while we've seen people move towards more affordable locales like the Phoenix suburbs or the Austin suburbs or places like that, it's unlikely that you're going to see a bunch of people decide they want to live

in like southwestern Missouri if they weren't already living there. When we opened up the phone lines for this episode, we heard from a listener named Travis who lives in a town about 25 miles outside of Wichita. Cheney, Kansas. It's a small town of about 2,500, really built off the railroads, you know, 100 plus years ago. Travis is a preacher in town and he's been trying to buy a place, but he's competing with Wichitons? Wichitinians? Witches? Not sure anyway.

But like they can now all work remotely and that put him in a weird position. Do we need to buy in Wichita because there are more houses? We have more opportunities to actually be able to get one. But if we did that, then I would have to do a reverse commute. A lot of people live here in Cheney

and drive into Wichita for work. I would be living. A lot of people live here in Cheney and drive into Wichita for work. I would be living in Wichita and driving out to Cheney. Is this reverse commute going to be more of a thing now that suburbs have become even more desirable? It really depends where you live. But as I said at the beginning of the episode, prices are hot everywhere. And as COVID-19 kind of comes to an end for a lot of Americans as they're able to get their vaccines, a lot of the urban amenities that we haven't been able to enjoy over the last year, things like restaurants or plays or music or other kinds of gatherings with a bunch of your friends haven't been possible. And now that they are, the value of living in a city goes up again. And so it's unlikely that we're going to see a bunch of cities somehow become less desirable to the general public as those urban amenities comes back.

What about the like two thirds of people who do jobs that are tethered to where they live? How could the way all this plays out affect their chances of home ownership? So one interesting thing is that a lot of the biggest cities in the United States, places like Boston and New York and LA and Seattle, these places are as big as they are, not because a small amount of wealthy individuals are able to live there, but because when high income workers move to a city, they bring a lot of demand to that city. So that means if you are someone who works in the service industry, and that means anything from working as a lawyer to working as a server at a restaurant, all of those people, all of their jobs are a function of the demand in the city that they live in. So if we have 30% of American workers are able to move and choose to move to cities that

aren't the traditional coastal superstar cities, then you will see the ability for people who are tied to their jobs, people who are servers in restaurants or who are taxi drivers, the demand for those kinds of jobs will go up in the cities that move. So the really relevant thing here about which cities become boom towns and which ones don't is what happens with higher wage workers. One question we got from listeners was just like, I don't even know if I want a house anymore. I don't even know if we should want a house anymore. Clearly, a lot of Americans still do. And with millennials entering this market, it's this confirmation that millennials weren't just disengaging from this American dream. They just couldn't make it happen

yet. But is there a way to evaluate whether this boom, whether this trend, whether this American dream, this classic tale of like get a house in that white picket fence is good or not? Should we be doing this? Is there another way? Yeah. These are some big questions for you. Yeah. I definitely don't have all the answers there, but I think one thing that people have been evaluating for a long time is whether, you know, the government should be encouraging home buying as the only way that Americans can build wealth. America is a really expensive country. Retiring here is really expensive. It's really expensive to maintain your living costs. It's really expensive to,

you know, continue to buy food and continue to take care of your health care costs, even if you're able to qualify for Medicare. And so people have for a long time been able to afford these kinds of things by saving up equity in your house, and there's research that shows this, is once you become a homeowner, you become very, very frightened about any kind of change that could affect the value of your home. And that means homeowners often are very vocal in opposing new homes being built in their area that could serve as more affordable housing. It means they're really scared of any kinds of changes that could affect their neighborhood. And a lot of times that ends up hurting the economic growth largely of the entire country and it ends up hurting the wages of the average worker. I mean, there's been a lot of debate over other ideas, like Senator Cory Booker has an idea around baby bonds. Every child born in America should have a savings account, should have a bond.

So when you're 18, every kid in America has a stake in this economy. But none of this stuff has been seriously considered. It's pretty well etched into the American psyche that the way to be successful, to build life for yourself, is to invest in homes. And thinking about that as an investment versus just a place you want to live is the root of a lot of problems, but it's probably not going away. I mean, are there other ideas to make this longstanding and apparently never going anywhere dream of owning a home in America more accessible to all these people on the, I don't know, lower 45 degree angle of this K-shaped recovery?

Yeah, the biggest thing that can be done is to reform local zoning laws. And that stuff really sounds boring when people talk about it. Like, why do I care if there are, you know, minimum lot sizes? Why do I care if there are onerous parking requirements and people tune out? But these are the rules that dictate whether or not you will ever be able to afford a home or even afford rent in the place where your job is. Right now, a lot of this power is concentrated in the hands of local elected officials whose interests are to make sure that their own constituencies are happy, but they don't really have any desire or need to care about potential future residents in their area. And

what we need right now is for there to be more of an interest from state governments and from the federal government in ensuring that we are building enough homes in the places where there are good jobs. So it doesn't mean that if you are living in Boston and you're trying to afford an apartment on, you know, a minimum wage salary that you have to live, you know, 30 or 40 or 50 miles away from the place where you work. People are very angry at people who are overbidding and driving up the price of a new home. But we could change the rules and make it so that we don't have to compete like over the top for three or four houses in your area. You can actually just buy a house in a place that you need to buy one or rent in a place where you need to rent. Hi, my name is Courtney. We live in a small town in eastern Washington state called Pullman.

And we were able to put in an offer and be accepted on a small house in a town 20 minutes outside of Pullman. This is a very weird feeling for us because we didn't think we'd be able to afford a house for another couple years, but the unique situation of some financial stuff happening with us and then the pandemic having historically low rates let us actually afford a house right now. So it feels very weird because we're so happy and excited because we've wanted to own a home, but at the same time, it's only possible because of this huge national crisis that hasn't really hit us. We've both kept our jobs, still going to school, all that kind of stuff.

And so it's just like so exciting and so full of dread all at once. And it's just, it's very confusing. But here's to hoping our contract goes through and we get the house, I guess. Thanks. Love the show.