When Covid-19 first hit, those of us in the real estate industry predicted a collapse of the housing market. In just 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 unfolded was a transformation of the housing market, fueled by what I call “migration mania.”
For employees in many industries, working remotely during the pandemic effectively has untethered them from their physical offices. Historically, but even more so during the pandemic, those with higher-income jobs are the most likely to work from home, McKinsey & Company found. As a result, many of them have chosen to move from more expensive areas of the country to lower-cost metros.
This emergence of buyers relocating to lower-cost markets, paired with low interest rates, limited housing supply, investors looking to make money on the housing upswing and home shoppers caught up in the excitement, mean higher home prices. In the existing market, which represents the bulk of total home sales, prices are up 24 percent nationally from prices in May of last year, according to the National Association of Realtors.
But this is not an equal-opportunity boom. The housing rebound has been fueled by buyers whose wealth allowed them to win bidding wars often with a high down payment and a bid over asking price. Those living on local incomes, which are often modest compared with those of relocating newcomers, are losing the ability to buy a home as competition grows and prices rise. In the long run, this means some Americans will be able to build wealth in their homes, leaving the rest behind.
At the onset of the pandemic, buyer confidence crashed. Sales slowed in March 2020, and by May, total transactions were down by 24 percent from the start of the year. Yet May marked the bottom for home sales: Spring 2020 wound up heralding the biggest housing boom in over a decade, helping hundreds of thousands of Americans get back to work. After being cooped up for months, consumers jumped into the market to find their dream house, much to the delight of builders and realtors.
By summer 2020, it became apparent that the demand for housing far exceeded supply, sending prices skyrocketing. In 2019, the median sales price for a home grew 4.9 percent over 2018 levels; by the last six months of 2020, it had jumped to 13.4 percent, according to the realtors’ association.
Soon, wild stories began cropping up from around the country: homes selling for hundreds of thousands of dollars over the asking price, two-year-long wait lists, realtors holding live auctions, people camping out for days for the chance to buy a new home despite not knowing its price. This frenzy recalls the mid-2000s housing boom — and that, understandably, has people worried.
But today’s market is different. This boom isn’t driven by loose credit and speculative lending. In fact, home buyers today are financially sound, with 73 percent of mortgages in the first quarter of this year going to those with a credit score of at least 760, up from 64 percent last year. Beyond good credit scores, buyers today have healthy debt-to-income ratios and wealth thanks to some combination of savings, home equity, investments and generational transfer.
A growing gap in who gets mortgages
Share of new mortgages
80%
Great Recession
High credit scores
60
Covid-19
Recession
40
20
Low credit scores
2004
2008
2012
2016
2020
Share of new mortgages
80%
Covid-19
Recession
High credit scores
60
Great Recession
40
20
Low credit scores
2004
2006
2008
2010
2012
2014
2016
2018
2020
At the same time, rapidly rising home prices are leaving some potential buyers priced out, possibly forever. Those who cannot afford a sizable down payment or lack a good credit score have been less able to ascend the homeownership ladder — much less get on it — a critical part of building wealth.
The gap between the haves and the have-nots is especially pronounced in places swept up in the relocation frenzy. Phoenix, for instance, had the highest positive net in-migration in the latest data from the U.S. Census Bureau. According to Redfin, Phoenix real estate is luring those living in Los Angeles — and with good reason. Those moving from Southern California to Phoenix can find a like-for-like 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 averages $1.15 million.
Despite rising prices, Phoenix lags behind Los Angeles
Median sale price per square foot
$500
400
Los Angeles
300
200
Phoenix
100
0
2012
2014
2016
2018
2020
Los Angeles
Median sale price per square foot for all residential property
$500
400
300
Phoenix
200
100
0
2012
2014
2016
2018
2020
As a result of the influx, home prices in Phoenix are roughly 20 percent above levels last year compared with just a 3.2 percent rise in local incomes.
So while Phoenix’s relative affordability is allowing shoppers from higher-priced markets to drive up local home prices, it drives out local buyers.
Costs soar in Phoenix
Year-over-year change in home prices
+25%
+20
+15
+10
+5
0
2018
2019
2016
2020
2021
2017
Year-over-year change in home prices
+25%
+20
+15
+10
+5
0
2018
2019
2016
2020
2021
2017
The same trend is playing out in other large and growing markets like Austin, Texas, and Tampa, Fla., but also in smaller markets. Home prices in Salisbury, Md., went from 3 percent growth between May 2019 and May 2020 to 15 percent growth between May 2020 and May 2021. Boise, Idaho, a strong market before the pandemic, grew 11 percent between May 2019 and May 2020 compared with 36 percent between May 2020 and May 2021.
Home prices surge in growing metros
Austin, Texas
+40% in price, year-over-year
+30
+20
+10
0
2018
2019
2016
2017
2020
2021
Tampa, Fla.
+20%
+10
0
2018
2019
2016
2017
2020
2021
Salisbury, Md.
+20%
+10
0
2018
2019
2016
2017
2020
2021
Boise, Idaho
+40%
+30
+20
+10
0
2018
2019
2016
2017
2020
2021
Austin, Texas
Tampa, Fla.
+40% in price, year-over-year
+30
+20
+10
0
2016
2017
2018
2019
2020
2021
2018
2019
2016
2017
2020
2021
Salisbury, Md.
Boise, Idaho
+40%
+30
+20
+10
0
2016
2018
2019
2020
2021
2018
2019
2017
2016
2017
2020
2021
All this to say: Relocation buyers have and will continue to fundamentally change the housing landscape across the country. The agglomeration of higher-income individuals 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 locals at risk of being priced out in these relocation hubs a shot at homeownership, officials should incentivize development near public transportation, convert underutilized commercial real estate into housing and spur the construction of more affordable homes via tax incentives. Builders and developers should focus on lower-priced homes. Buyers should be ready to accept a smaller home or more densely populated neighborhood for affordability. And lenders should extend access to mortgages without repeating the loose-lending mistakes of the last housing boom.
Ultimately, less-stringent zoning rules, better funding to recruit and train construction workers, and pro-housing policy will help prevent a large number of Americans from being permanently excluded from homeownership.
Ali Wolf is the chief economist for Zonda. She is the creator of Zonda’s proprietary indexes, including the New Home Pending Sales Index and the New Home Lot Supply Index.
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