Over the last two years, housing prices have climbed, climbed, and climbed some more. Empirically, U.S. house prices went up by 23.8 percent from December 2019 to November 2021. This is the fastest rate on record. The fundamental question is why. Why have housing prices exploded?
As public equity markets collapse, we might further ask, is housing driven up by the same bubble dynamics? Was easy money the primary cause of our inflated housing prices? Looking forward, will housing similarly crash as interest rates rise and the Federal Reserve balance sheet is shrunk? These are important questions and they are in need of an urgent answer.
Enter economists. There was a really interesting paper published this month by John Mondragon and Johannes Wieland. In it, the authors claim that while they cannot explain the entirety of the increase in housing prices over the last two years, they can certainly explain some of it. Their explanation for the increased value of housing is the shift to remote work. In this narrative, as employers shifted to remote work, not only did people in cities move into less dense areas but also people generally cared more about housing. As the authors quantify, “we estimate that an additional percentage point of remote work causes a 0.93 percent increase in house prices.” In total, the authors claim, “remote work raised aggregate U.S. house prices by 15.1 percent.”
Of course if this paper is correct then at least some of the housing spike can be explained by fundamentals instead of speculation. In fact, the authors explicitly say just that. As the authors conclude, “Our results suggest that the increase in house prices over this period largely reflect fundamentals rather than a speculative bubble, and that lower interest rates and fiscal stimulus were of lesser importance.”
But of course, even this “fundamentals” driven approach is insufficient to explain the totality of housing price increases. After all, the authors concede that their model can only explain 15.1 percent of the increase. What about the rest? From equity to crypto, as all other asset bubbles continue to pop, it is hard to imagine that housing did not benefit whatsoever from easy money. Surely there was at least some housing speculation…
As such, I can identify two massive risks to the housing market. First, rising rates and falling balance sheets can still wipe out a substantive amount of value. Second, if remote working reverts what happens to housing prices? In a certain sense, if remote working was the reason for higher prices, then less remote working might imply lower prices. The two have twin fates. They rise or fall together.
It is likely that some remote work will end. Further, much of the normalized housing speculation will evaporate in our current baptism by interest rate. Therefore, are we driving on a highway to a housing bubble pop? If so, how bad will the carnage be?