Housing: A Seller’s Market for How Long?

There’s a service whose “price” gone up 80 percent in the last six months and that’s the 30-year mortgage. Rates for a 30-year mortgage have risen from 3.1 percent last December to nearly 5.6 percent this past week. That increase has driven the monthly cost of said mortgage (with taxes and insurance) on a $300,000 house from just under to $1,800 a month to roughly $2,000. That’s a more than 10 percent increase in the monthly cost of the mortgage in just six months. Visually, the shift in rates looks more like a COVID surge than the normally placid undulations of the rate market.

Rising rates will eventually cool the market to a degree; the initial stages of this cooling may already be happening and that’s exactly what the Federal Reserve is hoping for as it tries to catch up with, and reduce, the highest inflation rates in the last 40 years. Housing costs, along with rising food and energy costs, have been a key contributor to increasing inflation. The price moves of the last couple of years have been impressive. According to the Alaska Housing Finance Corporation:

• In Southeast Alaska, the average sales price of a single-family home increased more than $80,000 compared from 2020 to 2021 with a 2021 year-end average of $483,705 for 2021. An increase of nearly 20 percent.
• The Mat-Su region jumped more than $46,000 with a year-ending average of $347,930; equal to a 15 percent increase.
• Average prices in the Kenai Peninsula Borough increased 13 percent ($35,000) from a year earlier. Average sales prices in 2021 were slightly over $310,000.
• Anchorage saw a $27,000 (6.8 percent) increase with an average sales price of $424,000. 
• Prices for single-family homes in Fairbanks went up $25,000 (8.6 percent) for an average price of $307,000.

Nationally over the last 40 years, price increases of four to five percent per year have been more typical.

The price increases seen over the last two years aren’t sustainable which is one of the reasons why the Federal Reserve is increasing interest rates. The last time the country saw increase like these was right before the 2007 financial crash. However, market conditions this time around aren’t anything like those that existed fifteen years ago. Could it be a bubble? Yes. Is it the same bubble as 2007? No. The increases of the last 24 months have been largely driven by a shortage of new housing starts since the 2007 crash, low supply, and buyers worried about being left out. Let me touch on each of these factors one-by-one.

The U.S. has been underproducing homes ever since the 2007 crash. The crash torched homebuilders resulting in bankruptcies, unfinished projects, and inventory that took years to work off. Emerging from crisis, the survivors played it safe by starting hundreds of thousands fewer homes per month over the course of a decade-and-a-half. It’s only been within the last six months that new housing starts, encouraged by high prices and low supply, returned to turn-of-the-century levels.

What causes higher prices? Higher prices occur when demand outstrips supply; remember it’s all relative. You can have higher prices when supply is low, when supply is moderate, and when supply is high as long as demand is relatively higher than supply. Over the last 24 months demand for houses has been high relative to supply and supply has been historically low as most people have been hunkered down in their homes and not really looking to move. While the number of housing transactions in Alaska in 2021 and 2020 was higher than that in 2019, all three years were substantially lower than the number of transactions seen in 2016 as when prices didn’t increase at nearly the recent rate. Prices are up in part just because demand has outstripped supply. As supply normalizes and demand cools, prices should find stability or even fall.

Source: AHFC, 2022.

There’s a third element to the housing market that’s piqued my interest of late. My parents and my in-laws were both in Anchorage earlier this month for eldest child’s graduation from high school. My in-law’s stayed in a hotel while my parents rented a fully-furnished condo from a well-known online vendor. Concurrently I experienced two other events which gave me pause: 1) Last summer three homes around me sold simultaneously. All three sat empty through the winter and two are now occupied. I was speaking to the new owner of one of the occupied homes and I mentioned to him that I’d heard he might be related to the buyer of one of the other homes. He said yes, but that home was being used as an online short-term rental. 2) I was facilitating a planning event for a local company, and I stuck up a conversation with a new employee who had moved here from the Midwest. Her housing runs out at the end of May because the owner was converting the unit in a short-term rental and that she was having trouble finding a new unit because so many other owners had converted their rentals.  

So, just how much of our housing stock is now consumed by online short-term vendors? I decided to go to one vendor’s website and find out. I searched for whole units (i.e., no shared spaces) with all the basics you need for living: heat, kitchen, washer, dryer. There are a minimum of 1,000 capable units in Anchorage that meet my definition for useable spaces. According to the U.S. Census Bureau there are just under 120,000 housing units in Anchorage so at minimum online renting is consuming 0.8 percent of Anchorage’s housing stock. I did the same search for Juneau and produced a minimum of 0.9 percent of the City and Borough’s housing stock. That portion might not seem like much until you realize that the vacancy rate in both locations is around 4-5 percent (indicating tight conditions), and that portion is a key difference between a tight housing rental and healthy housing rental market. I’m not in any way advocating limiting online transient rentals. I’m simply noting the impact of technological and market shift that allows property owners to maximize returns on their property and it’s potential impact on housing conditions for residents within the community and on the price of homes. When the productive capacity of an asset increases, the price of that asset increases. Such as what has happened in the housing market with the explosion of Airbnb and the like. 

Jonathan’s Takeaway: My expectation is for Alaska’s aggregate housing market to cool this summer which will allow market conditions between buyers and sellers to normalize. I do not expect a crash or bubble to burst in the state as housing conditions remain tight and the construction of new homes has not kept up with demand and is constrained in many locations by land availability and high costs.

Jonathan King is a consulting economist and Certified Professional Coach. His firm, Halcyon Consulting, is dedicated to helping clients reach their goals through accountability, integrity, and personal growth. Jonathan has 24 years of social science consulting experience, including 18 years in Alaska. The comments in this blog do not necessarily represent the view of employers and clients past or present and are Jonathan’s alone. Suggested blog topics, constructive feedback, and comments are desired at askjonathan@apcm.net.