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Go back to the 70s? Today’s real estate market has echoes of a dark era.
High inflation and a disappointing report on economic growth – followed by a sudden fall in shares late last month – created a familiar economic combination.
These conditions were characteristic of the 1970s, when inflation rose, leading the Federal Reserve to raise interest rates. The central bank’s measures to control inflation have increased borrowing costs for property developers and ultimately reduced the purchasing power of homebuyers.
As a result, the housing market stagnated and the decade itself became synonymous with stagflation, an economic cycle characterized by high inflation, tepid growth and weak employment, leading to a stagnant economy.
While these trends may seem familiar, the current real estate market is resilient. Not to mention, job growth is solid.
The biggest problem today: stock shortages.
“We could argue that there is weakness in the housing market right now, caused by a supply-side shock,” said Mark Fleming, chief economist at First American, told Yahoo Finance. “In other words, restriction in the supply of a good, which is causing inflation. …But I wouldn’t say we’re in stagflation,” Fleming noted. “The problem is not weak demand, it is weak supply.”
Claudia Sahm, former Fed economist and chief economist at Counselors of the New CenturyLLC, agreed with that sentiment.
“This is not stagflation,” Sahm said. “The GDP numbers look weak, but consumer spending is just moving forward. …But we are in this ongoing fight against inflation, and people call inflation all kinds of things.”
See more information: Mortgage Rates As High As 7% – Is This A Good Time To Buy A Home?
A sign is placed in front of new condos for sale in Los Angeles. (Credit: Mario Tama, Getty Images) (Mario Tama via Getty Images)
A housing supply gap of 6.5 million homes
At its root, inflation is the result of an imbalance between supply and demand.
In the housing market, weak inventory was a problem that existed before the pandemic due to more than a decade of underconstruction. When interest rates fell to historic lows, buyers flocking to the market found themselves with scarce inventory.
This has resulted in bidding wars, frantic buyers forgoing inspections to close deals faster, and home prices rising to record levels in some hot markets.
“We had weaknesses before the pandemic, and the pandemic blew everything up,” Sahm said. “That was absolutely the case with housing.”
As the owners hunkered down and focused on refinancing with lower rates During the pandemic, construction companies saw an opportunity to increase the supply of homes in the country.
In March, there were 477,000 new single-family homes available for purchase in various stages of development, compared to 970,000 existing single-family homes.
Overall, new construction represented a third of the inventory on the market that month – well above the 12% average, according to data provided by the National Association of Home Builders (NAHB).
The story continues
However, even after all this, overall inventory construction remains tight.
A man carries a ladder during construction of a new home in Trappe, Maryland. (Credit: Jim Watson, AFP via Getty Images) (JIM WATSON via Getty Images)
While builders are responsible for much of the inventory currently available, the lack of supply is also caused by homeowners who are “trapped” – subject to ultra-low rates they don’t want to give up.
The US still lacks 6.5 million single-family homes compared to the number of families starting new families, Realtor.com found.
“In the 2010s, after all the construction companies went bankrupt when the housing bubble burst, they only built big houses because only the rich could afford them at that time,” Robert Frick, corporate economist at Navy Federal Credit Union, he said. “So not only are we left with fewer homes, but we are also left with a shortage of smaller homes where people could start.”
What has changed? “Builders are now building smaller homes,” Frick said.
In a way, this imbalance between supply and demand is what is reflected in the Consumer Price Index, an inflation gauge that shows the prices of everyday goods, from gasoline and food to housing and rent.
While shelter in place represents a third of the overall CPI reading, it is just a snapshot in time that fails to paint a picture of what homebuyers are experiencing today.
“Housing and shelter inflation is the only part of the CPI that doesn’t tell us where we are right now,” Sahm said. “In terms of housing costs rising or falling, it’s telling us this story over time, and we’ve had big swings.”
While, yes, housing inflation is still hotter than expected – it has also come a long way in recent months.
House prices have increased 5.7% over the past year, according to the latest CPI, but have fallen from a peak of 8% in March 2023.
According to Sahm, shelter inflation has failed to reflect the inventory newly entering the market, including new construction underway. As that supply enters the market, shelter inflation is expected to continue to slow this year.
‘You can’t buy what’s not for sale’
A man walks his dog in front of a “for sale” sign displayed outside a single-family home in Los Angeles. (Credit: Allison Dinner, Getty Images) (Allison Dinner via Getty Images)
According to some housing experts, concerns about stagflation stem from a slower pace of sales in recent months.
For example, the percentage of previously owned homes fell by just over 4% in March, according to the National Association of Realtors (NAR). Year over year, sales fell nearly 4%.
While the number of homes on the market shows signs of improving, it is still near historic lows.
Still, despite the slowdown in sales, demand still exists – even in a context of higher prices and interest rates.
“Buyers, even first-time homebuyers, are finding a way to buy and afford something, even with a 7% mortgage rate,” Fleming said.
The obstacle in the market is inventory, especially on the domestic side of the market.
The inventory of unsold existing homes grew nearly 5% from the previous month to 1.11 million in March. According to NAR, this is equivalent to just over 3 months of supply at the current sales rate. Still, this is well below the six months needed for a balanced market.
“You can’t buy what’s not for sale,” Fleming said.
In April, the national average listing price for active listings was $425,000an increase of just over 14% compared to the previous year, a separate Realtor.com study found, and up just over 32% from April 2020 levels. Overall, active listings were down 60% compared to 2020.
“Prices remain sticky only because of lack of stock. We are still far from normalized inventory levels,” Melissa Cohn, regional vice president of William Raveis Mortgage, told Yahoo Finance. “Until we get there, there are still enough buyers out there to keep prices at higher levels despite high interest rates.”
Job markets are expanding
A real estate agent hands out information about a home for sale during an open house in San Francisco. (Credit: Justin Sullivan, Getty Images) (Justin Sullivan via Getty Images)
Unlike the stagflation era of the 1970s, which had high unemployment rates coupled with high inflation – this is not the case today.
The US labor market remained stable in April, although fewer jobs were created than expected. The Bureau of Labor Statistics also recorded a slowdown in wage growth and a modest increase in the unemployment rate.
Overall, some 175,000 new jobs were added for the U.S. economy and the unemployment rate rose to 3.9% last month, the Bureau of Labor Statistics found. At the same time, average hourly earnings increased by 0.2% month-on-month and 3.9% annually. That was slightly below economists’ projections of a 4% annual increase.
“Spending is good, income is good, job markets are expanding at a good pace. That means more wages, more income, more spending,” said Frick. “I have no concerns about the economy.”
In contrast, in the 1970s, unemployment grew significantly while inflation was high. Between 1970 and 1974, the average unemployment rate was 5.4%according to the BLS.
The latest jobs report, however, improved expectations that the Federal Reserve would cut its benchmark interest rates at some point this year – although inflation remains above its 2% target. This is a positive for hopeful homebuyers who want a break from high borrowing costs.
“The sad situation is that the economy is fine, but rates and mortgage rates are high,” Frick said. “So we have this strange situation where the economy is running on, say, seven cylinders, but the eighth cylinder – housing – is failing like crazy.”
Gabriella Cruz Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.