The value of home vs. inflation, interest hikes and a potential recession.
When we talk about the home-buying frenzy of the past two years, we forget that it was also an everything-buying frenzy. Americans decimated the inventory of highly discretionary, big-ticket items like Pelotons, BBQ smokers and chaise lounges. We also loaded up on basic necessities: food, socks, soap. But where does real estate fit into that spending spectrum – are houses more like Pelotons, or more like soap?
That seemingly ridiculous question was the crux of a serious debate that arose in the aftermath of the housing crash of 2008: Is housing a luxury or a staple? The answer is supposed to tell us what will happen when the music stops. Will people stop buying homes (and pushing up prices), or focus all of their financial firepower on the most important purchase of all?
But this moment is very different from 2008. Household balance sheets today are very strong, as are the job market and the loans underpinning the housing market, and the differences in supply and demand are profound. Even after increases in recent months, housing supply is still less than half of what would be needed to meet average demand. And with the largest generation in the country, millennials, now reaching peak-home-buying age, demand will continue to be well above average.
The result is that home values are still forecasted to rise 9.3% this year – half as fast as over the past twelve months, but more than double the average annual rate.
And as for that luxury vs. staple debate, the answer is clearly both. Sales of luxury homes fell 17.8% in Q1 this year, while non-luxury home sales declined by only 5.4%.