2020-22 HYPER House-Flation
The average home price in the US soared roughly 85% in the past decade. But as we all know, averages are misleading and often distorted. In some areas, pricing has soared well beyond 85%, especially in the past 3 years. By any standards, this is HYPER pricing inflation. And that usually does not end well. Most times it is unsustainable. So why have home prices soared so far, so fast, aside from excess cheap capital? Here are some reasons:
1. Under building. Under-supply always fuels pricing. The demands on profitability make many projects unfeasible and have placed too great a focus on more expensive, more profitable housing.
2. Too great a focus on building rental properties when the majority of Americans wish to own a home. More under-supply.
3. Lots of real estate was underpriced: many when buying did not factor in replacement cost. Building is expensive: aside from land, labor, and materials, TIME fuels cost with lengthy, complex local approvals and bureaucracy.
4. Some hyper-growth cities and towns with relatively cheap homes mostly due to lots of cheap land and labor have been subject to a rapidly growing wealthier audience willing and able to pay (LOTS) more. This has accelerated pricing and fueled averages.
5. The wealthy are MUCH wealthier than 20 years ago. There are roughly 22 million millionaires in the US. Many own second and third homes. On average the wealthiest Americans grew their wealth by about 25% in the past 3 years.
6. America is getting older. Many are staying in their homes while aging, reducing and slowing the cycle of home selling due to aging.
What happens after hyper-inflationary periods? It varies. Some areas pull back more than others. Some pull back slowly, some quickly, and others not at all. There are so many variables. We can be certain that the extreme house inflation we saw in some areas of the US impacted national averages.....which fuels overall inflation when housing represents about 32% of CPI. The Fed does not regionalize its policies, so the entire US is lumped together as one economy, and we will all be impacted by higher rates.
Between 1967 and 2022, housing experienced an average inflation rate of about 4.21% per year (more than double 2% target inflation)......10, 15, 20% annual gains are extreme by any standards. (PS: I'll take 4.21%!)