What The Real Estate Industry Won’t Tell You | Ezine Daddy

For more than two years, home prices in the Phoenix area have risen faster than any other city in the S&P/CoreLogic Case-Shiller Home Price Index. The average single-family home price in the greater Phoenix area increased by $100,000 in 2021 and continues to rise at an insane rate in 2022, according to Phoenix MLS data.

#1 Reason for Skyrocketing Home Prices

Almost everyone agrees that the primary cause of our skyrocketing home prices in Phoenix and the United States is the extremely low number of homes for sale. What we don’t agree on is the reason for the low supply of homes for sale.

Metro Phoenix had 9,700 single family homes for sale at the end of 2019 (pre-Covid). At the end of 2021, only 4,500 single-family homes were still for sale in the Phoenix MLS.

The real estate industry likes to say that the only solution is to build more homes in the future. Your unspoken point is that we cannot stop the rise in house prices today.

What the real estate industry doesn’t tell you

The industry conveniently ignores the other part of the supply equation: the number of homes sold. The number of houses for sale equals the number of houses for sale minus the number of houses sold. (Very few homes were taken off the market unsold.)

The supply of houses for sale is so low today because investors have bought up so many houses that they have reduced the supply of houses for sale. Mathematically, when investors buy more homes, there are fewer homes for sale.

Let’s compare 2021 to the last year before the pandemic, 2019. At the end of 2021, we had 5,200 fewer single-family homes for sale in the Phoenix MLS than we had at the end of 2019. But in 2021, investors bought 5,900 more single-family homes than in 2019.

Had investors bought the same number of homes in 2021 as they did in 2019, the number of homes for sale would have risen to pre-Covid levels by the end of 2021, and the magnitude of median house price increases would have disappeared to pre-Covid levels.

Much higher purchases by landlords caused house prices to skyrocket

In the country’s hottest real estate market, Phoenix, the supply of single-family homes for sale would have been back to pre-Covid levels by the end of 2021 — except investors bought many more homes in 2021 than before.

Investors bought more than twice as many homes as in 2019. In contrast, occupied buyers actually bought fewer homes in 2021 than in 2019.

Why Did Landlords Buy So Many More Homes in 2021? There are many reasons including the increase in short-term rents that has taken thousands of homes off the Phoenix housing supply and into the Phoenix housing supply.

A national, long-term, systemic cause is that real estate investors get huge tax breaks that live-in owners don’t get. Landlords naturally buy a lot more houses because of these tax breaks.

These government stimuli also make housing booms (and crises) much bigger than they would be if the government didn’t essentially pay landlords to buy single-family homes.

Because of these tax breaks, we initially have more homes owned by investors. Then when the market heats up, even more investors jump in and buy than if we didn’t have those tax breaks. Real estate prices are rising much more because of these tax breaks.

Why increased demand is driving house prices up so much

In economic jargon, both the price elasticity of supply and the price elasticity of demand are incredibly inelastic for single-family homes. This means that real estate prices are very sensitive to unexpected increases in demand.

If, for some reason, the number of homes being sold skyrockets, home prices will rise abnormally because it will take so long for the supply of homes to increase enough to keep up with the increase in sales.

Additionally, demand for single-family homes is also incredibly inelastic, meaning these higher prices aren’t reducing the number of homes sold very much. Prices have to rise unusually sharply to reduce sales.

Taken together, the two extreme inelasticities mean that a small increase in demand for homes can lead to increases in house prices that seem wildly disproportionate. That is, compared to other goods, an increase in demand for houses leads to an extreme increase in prices.

there is more Because houses are partly an investment good for homeowners who live in them and 100% an investment good for landlords, house prices can behave more like stock prices than consumer goods prices. As with stocks, rapid price increases lead optimistic buyers to buy, expecting prices to continue to rise. Unfortunately, the most optimistic buyers set the prices for stocks and houses.

Rapidly rising house prices make houses more attractive for these momentum traders to buy, causing house prices to continue to rise in a feedback loop. Also, if you start with a certain amount of money, you can borrow a lot more money to buy houses than you can buy stocks. This allows real estate prices to rise even faster in a hot market.

The fastest way to increase the supply of homes for sale

A quick fix for the low supply of homes for sale in Phoenix and the US is to level the playing field and stop giving landlords tax breaks that homeowners don’t get. Make it so everyone gets tax breaks on a home if they own it and live in it, but that’s it — no tax breaks at all on other single-family homes or condos they buy in the future. Then watch as US home prices get less crazy in both good times and bad.

If we had done this economically a year ago, the US would now be well on its way back to normal supply levels, and we would also significantly reduce the magnitude of future housing booms and busts. Far greater economic stability for households would lead to far greater economic growth in the future – at no additional cost to the government. Homeownership rates would also increase – at no additional cost to the government.

We have many other economic knobs we could tweak to stabilize US housing supply and prices — if needed — but first the government should at least stop making things worse with its huge tax breaks for landlords.

Here’s a crazy example. Last year the typical home in Metro Phoenix was valued at $100,000, but when it’s owned by a landlord, our ingenious government pretends the house has depreciated and gives the landlord a tax deduction for the imaginary depreciation! No wonder investors have been buying more and more single-family homes for decades and US house prices have become increasingly unstable.

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