Home Prices to the Moon? Americans Say `No Thanks’

Bidding wars for homes has soured people on reaching for the American dream: for the first time in nearly 40 years, a majority of University of Michigan survey respondents, 54%, say it’s a bad time to buy a house.

There’s always a limit to how much any buyer will pay, whether for a share of a company’s stock, a painting at auction or – in this case – a house. 

The pandemic surge in home prices and the sudden emergence of bidding wars in rural and suburban areas has quickly soured public opinion on the idea of buying a home.

For the first time since the high-interest rate period of the early 1980s, the University of Michigan consumer sentiment survey shows most people say it’s not worthwhile to go home shopping. 54% of respondents say it’s a bad time versus 44% who say it’s a good time, for a net negative reading of 10 percentage points

The rapid change in sentiment towards buying a home is another piece of evidence supporting the old Wall Street adage that “the cure for high prices is high prices.” The saying encapsulates a behavioral response to a rapid price increase; buyers experiencing sticker shock step back, while producers get greedy and crank out more supply. Together, the two forces could quickly snuff out a rally.

That’s likely been the case for a key input into the cost of building a home: lumber, a product that has garnered a lot of media coverage on the way up, but scant headlines on the way down.

The price of lumber contracts for July delivery are down 28% since peaking May 7 (data as of June 7). Prices for lumber for delivery in the fall and winter months have plunged even more, a potential sign that traders see supply shortages, demand destruction and the typical winter slowdown in construction bringing the market closer to being in balance. September lumber contract prices are down 35%, while November contracts have plunged 40% since May 7 (data as of June 7).

Horizon Investments’ view is that broad measures of inflation – such as the Consumer Price Index — will likely not spiral higher, so it shouldn’t be a primary concern of goals-based financial plans (see our in-depth Market Notes report on inflation).  From our perspective, years of low and stable prices have conditioned consumers and businesses to recoil at the thought of paying much higher prices unless it’s absolutely necessary.

Buying a home may be a priority for many people, but they may also be willing to wait until prices become more reasonable. That may already be playing out. The number of applications for a mortgage to buy a home have fallen 21% from the peak on April 16 through June 4, according to non-seasonally adjusted data reported by the Mortgage Bankers Association1.

Patience, in this case, can be both a virtue and way to slay inflation before it gets out of control.

1 https://www.mba.org/2021-press-releases/june/mortgage-applications-decrease-in-latest-mba-weekly-survey-x280704


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