During downturns, house prices generally decline, not increase, and they especially don't shoot upward at extraordinarily high rates, do they? Not until now, says Joint Center for Housing Studies Fellow Don Layton, former CEO of Freddie Mac.
In a January 7 paper, Layton pointed to Federal Housing Finance Agency (FHFA) data showing that despite the severe nationwide economic downturn, its index of house prices had risen an impressive 10.2% in the 12 months leading up to October 2020, and 1.5% in just the single month of October (an annual rate of an even higher 18%).
"This is a major event that should not be shrugged off or ignored. While it could simply be a pandemic-period distortion that will disappear as COVID vaccines are broadly distributed, it could also reflect a new normal for the dynamics of housing and housing finance," Layton said. "For this reason, anyone in housing should have a view on this issue, as house price appreciation is fundamental to the economics of how families develop wealth, how much risk there is in mortgage lending, what the right business strategy is for mortgage and home construction companies, and also for government policymaking."
After exploring causes—which he says include ultra-low interest rates, housing production shortfall, fewer houses for sale, a shift in family spending towards housing, and pandemic-induced acceleration in the purchase of second homes—Layton examined the implications of the trend.
"House prices—their current level and their expected path in the future, both on a national average level and in local market areas—are at the core of many key issues faced by the housing and housing finance industries, as well as government policymakers."
In his paper, Layton attempts to address four questions that examine the importance of prices, and why decision-makers need to distinguish between a short-term distortion or something that warrants a more fundamental change. Those questions include:
- What should foreclosure expectations be?
- Do very low interest rates help homeownership?
- Will traditional housing policies be effective?
- Is mortgage credit risk being accurately measured?
After analyzing those items, Layton concludes with a call on lawmakers to respond and determine what changes are essential. He notes, “I see today’s downturn-defying, strong house price growth not solely as a cyclical distortion that will quickly go away when the pandemic does; I see it, at least to a significant degree, as a more fundamental change than that. Everyone in housing and housing finance needs to determine what this new normal should—or should not—change about business models, business actions, and government policies so they can be as effective and successful as possible in the future.”
The full paper is available at jchs.harvard.edu/blog under the entry "The Extraordinary and Unexpected Increase in House Prices: Causes and Implications."