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The Causes and Implications of Fast Rising House Prices

Market Data + Trends

The Causes and Implications of Fast Rising House Prices

January 8, 2021
Homes on rising coin stacks
Photo: Andrey Popov

Home price growth directly ties in to how families develop wealth, the risks of mortgage lending, and the correct business strategy for mortgage and construction professionals, says former Freddie Mac CEO Don Layton. Home prices grew 1.5% in October alone and increased by 10.2% in the 12 months leading up to October. The recent spikes in average listing prices could either be a blip in the market, all due to the pandemic, or it is a glimpse into the future of housing and housing finance, according to Layton’s article for the Joint Center for Housing Studies of Harvard University. A view on whether this is the new normal or a fading trend is necessary for any professionals in the housing industry, Layton suggests. 

Causes: In trying to understand this unexpected development, we know some things that are not causing the extraordinarily high house price increase rate.

  • Tight labor markets. The unemployment rate, after peaking at 14.7 percent in April, came down to the still-weak level of 6.7 percent in November, with significant room to improve. The rate was at the unusually low level of 3.5 percent just before the pandemic hit.
  • High inflation. The consumer price index (CPI) has been running low for years, and was only up about 1.1 percent in the twelve months ending November 2020. Therefore, strong house price increases are not simply reflecting inflation – they are extraordinarily high on a real (inflation-adjusted) basis too.
  • A loose-lending mortgage bubble. The average national leverage of a single-family home (mortgage debt divided by the market value of the home) is extremely low at only 34 percent and risky products (e.g. mortgages with teaser rates) have been kept to a very small share of the market (well under 5 percent) by post-2008 financial reforms. Net, this is not a repeat of 2008.


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