Abnormal rise in house prices kills American dream

In recent months alone, the price of housing in several regions of the US has risen by tens of per cent. According to some reports, it is almost impossible to find a house cheaper than two hundred thousand dollars in America

Abnormal rise in house prices kills American dream
What’s happening in the USA will have a huge impact on what used to be called the American dream – because owning a home is almost its main component.

In July, home prices in the U.S. rose 18% year-on-year, according to the latest monthly survey by CoreLogic, a California-based company and one of the largest business information clearinghouses in the country. In its 45 years of monitoring the real estate market, it was the biggest year-on-year jump in prices. Among the major cities that saw a particularly steep rise in home prices were several metropolitan areas in the southwest: the administrative centre of Arizona Phoenix (plus 29.7%), San Diego, California (plus 23.7%) and Denver, the capital of Colorado (plus 19.3%).

This is the fastest increase in house prices since 1979. The situation is completely anomalous, as in the previous few years US property prices rose at a much more modest, single-digit rate. The main factor, according to CoreLogic president Frank Martell, has been the combination of exceptionally high demand and persistently low supply. Due to the large amount of money in the country, along with very low mortgage rates, house prices are rising.

The pandemic has triggered demand for properties in areas with lower population density and more space to live both inside and outside the home, added CoreLogic chief economist Frank Notaft. It is for this reason that in June private house prices posted their highest annual increase since the company’s index was created back in 1976 – 19.1%. This jump in prices has significantly outpaced increases in Americans’ incomes and reduced the affordability of housing, Notaft said, commenting to Bloomberg on the results of the latest survey.

In absolute terms, prices for new homes in the U.S. are already formed mostly in the hundreds of thousands of dollars. Analyst Bill McBride, an author of a popular blog on the American economy, recently published a chart showing that at the beginning of this year, the percentage of new home sales worth less than 200 thousand dollars has fallen to nearly zero, although at the beginning of the last decade it exceeded 40%.

However, this data does not give everyone confidence. Offerings of housing cheaper than 200 thousand dollars in the U.S. more than enough, says Yuri Mosha, founder of the international digital media platform e-pr.online. According to him, of course, it will not be the top metropolitan areas, but not quite a run-down place – even in Florida, you can find homes in this price range.

But in New York City, for example, Mosha adds, the minimum price of a home is now around $500,000. At this price level, buying a home, including mortgages, is a daunting task for an American family. However, the expert asserts that this is why people are leaving New York for places where dwellings are relatively inexpensive. For example, in Florida, where housing construction is booming, there is a queue for houses, because the builders cannot cope with the growing demand.

The previous cycle of rapidly rising house prices in the US took place in the mid-2000s, when demand for real estate and its value were fueled by super affordable “subprime” mortgage programs. What this led to is well known: by 2007 the amount of ‘bad’ housing debt in the US, and more importantly their penetration into the global financial system, reached such a size that the US mortgage crisis quickly triggered a global upheaval.

The current situation in US mortgage lending is fundamentally different, notes economist Khazbi Budunov, editor of the Telegram channel PolitEconomics. According to him, the amount of private debt in the U.S. is now at a safe level, and there is no increased risk of mortgage overheating at the moment.

However, as Bill McBride notes in a recent review, even cheap mortgages (the effective 30-year fixed rate was just 3% in June) are not making American housing more affordable. Over the past year, the average US household income has risen by 2.3%, while the monthly mortgage payment has increased by 21.5% and the average sales price of secondary market homes has risen by 24.4%.

In addition, home loans in the US are now not easily available to everyone, as was the case during the mortgage bubble. “The mortgage lending system in America is built in such a way that it is largely focused on those who in Russia are called public sector workers – teachers, firefighters, etc., that is, people receiving a steady income. For owners of their own business, even if you earn decent money, oddly enough, it is more difficult to take out a mortgage,” says Yury Mosha. The affordability of housing is becoming an increasing challenge for low- and middle-income Americans, CoreLogic experts comment on the social consequences of the recent price hike.

The problem of inadequate housing supply was a problem in the States even before the pandemic. In 2018-2019 it was housing construction that was the weak link that hampered the growth of the US economy – during this period construction spending declined by more than 10%. By early 2020, market sentiment began to improve, but then the coronavirus hit and construction activity fell to its lowest level in five years.

In addition, a series of problems arose in the mass labour market, on which the dynamics of construction depend heavily.
While America faced record unemployment last year, the number of vacancies in many sectors now exceeds the real available labour force, notes Khazbi Budunov. This, he says, is due to the help that the authorities provided to citizens – many Americans now have the opportunity not to look for work. This attitude was fostered not only by direct monetary payments, but also by solutions such as “holiday rents”, which allowed people to go rent-free for some time.

One way or another, the situation on the American labour market should level off, because the stimulus measures will come to an end sooner or later. But so far the shortage of people willing to work in construction is not getting any bigger. A recent New York Times article even asserts that Joe Biden’s ambitious infrastructure plan is in jeopardy because of the lack of skilled workers: young people are not willing to replace the jobs of their retiring parents.

The extent of the problems in the construction industry was also evidenced by the Affordable Housing Bill, introduced in Congress in the spring by Minnesota Senator Amy Klobuchar. In it it was stated that in order to provide all the Americans in need with accommodation on the background of record drop in supply the additional 2.5 million immovable property units should be put into operation. For this purpose, it was proposed to allocate 1.5 billion dollars from the federal budget to eliminate various barriers to new construction that exist in individual states.

Such barriers include, for example, targeted actions by local communities to limit the provision of land for development.
The ideology of “not in my backyard” (NIMBY) in America is very influential, and land for residential real estate is traditionally needed a lot, since the construction of mass high-rise housing in the States as a whole abandoned back in the 1970s – the symbol of the American dream is still the family home with a plot. In addition, environmental activists are becoming increasingly influential, who, for example, have already succeeded in getting some California cities to forgo the connection of gas to new homes, which also increases the cost of housing.

American businesses, including those completely non-core to the housing market, have already taken an active role in solving the problems. Not long ago, corporations such as e-commerce giant Amazon, which created a $2 billion fund to build affordable housing for low- and middle-income families, as well as Apple, Microsoft, and Google’s parent company, Alphabet, presented development plans. But so far, the mood among real estate developers is not the brightest: in August, the National Association of Home Builders (NAHB) index of American construction companies’ confidence in the country’s economy fell to its lowest level in over a year.

Mikhail Kuivyrko, VZGLYAD

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