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Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Blame remote work for soaring home prices

The US housing market has been on a tear since onset of the pandemic despite what might numerous headwinds including a doubling of mortgage interest rates. The median price of a home today is nearly 40% above the 2020 low, a major contributor to the elevated rate of inflation. And although sales were beginning to cool earlier in the year, momentum has reversed again as prices resume their ascent and the market remains exceptionally tight.

Several factors have contributed to the surprisingly strong housing market including a shortage of inventory, rising disposable incomes, a flood of Covid financial aid, suspension of student loan payments, and a surge in all-cash purchases by baby boomers. Some analysts have suggested the presence of another speculative bubble in real estate valuations, implying the possibility of an impending bust. But as it happens, the biggest single factor in the remarkable residential market strength was unexpected and outside the traditional scope of house price determinants. The primary force behind the housing boom appears to be the new paradigm of working from home.

Researchers from the Federal Reserve Bank of San Francisco studied the increase in home prices during the pandemic period from November 2019 through November 2021 and determined that over half of that price increase was due to the shift to remote work. Their results also held for the steep rise in rents. Their work suggests that a fundamental shift in job-related demand for housing is underway that may persist if the work-from-home trend becomes more permanent.

John Mondragon and Johannes Wieland of the San Francisco Fed looked at distinct geographical areas within commuting distance of major population centers to evaluate the share of jobs in each area that were remote before that pandemic and those that shifted to remote work during the crisis. They were able to correlate the growth rate in home prices with the share of work-from-home jobs both before and after the pandemic and found that the greater the shift to remote work in a particular geography, the larger the percentage increase in housing costs, including both purchase prices and rents. They showed that a 1 percentage point increase in the share of workers doing their jobs remotely caused a 1.5 percentage point increase in home price growth, by far the biggest single factor.

It is known that many workers who found themselves laboring primarily from the confines of the spare bedroom opted to move a more desirable location since the commute to the office was no longer a factor. To control for this effect, the researchers used credit bureau data to measure population shifts across the geographical zones they studied. While they did find that real estate values increased more in the destinations viewed as most desirable (California and Florida), the impact of migration was relatively minor compared with the desire for a more spacious, amenable, or affordable home office.

During the period studied, the transition to remote work accounted for 60% of the overall appreciation in home prices. According to the Bureau of Labor Statistics, about a third of US workers still work from home on an average day, not much lower than in 2021 and possibly suggesting a persistent new driver in residential real estate values.

Of course, other factors have conspired to push home prices up despite a 30-year mortgage rate now north of 7%. What the real estate industry refers to as an “inventory shortage” means that current homeowners are staying put, largely due to the so-called “golden handcuffs” of a cheap mortgage. A typical supply of existing homes for sale might run between 5 to 7 months’ worth of average sales. Today it is less than 3 months, offering a real-time lesson in supply and demand.

The shortage of existing housing has also created a bonanza for home builders. New construction surged coming out of the pandemic to levels not seen since before the Great Recession in 2006. And while housing starts dipped in 2022 with the Fed rate hikes, new buyers seem to have accepted the new mortgage reality and starts are surging again. Major homebuilders have seen their stock values rise by 30% to 70% year to date.

Meanwhile, cash-only purchases have reached levels not seen in a decade, accounting for over one third of all transactions. Research firm Redfin says Baby Boomers are rolling over their considerable equity appreciation to trade up, while some Millennials are buying with cash obtained, as they put it, from “the bank of Mom and Dad.”

Among the numerous forces at work behind the housing boom lurks a particularly nefarious but material factor: Covid relief fraud. The Payroll Protection Program (PPP) experienced a high rate of fraudulent claims, especially among those loans issued by a host of new non-bank FinTech lenders. Researchers at the University of Texas found that home prices within zip codes with higher rates of PPP fraud rose by 5.7 percentage points more than low-fraud zip codes in the same county after controlling for other variables. PPP scammers, it turns out, used some of their lucre to buy a house and push up prices even more.

The exceptional post-Covid rally in residential real estate initially came as something of a surprise. As it turns out, as with so many other conventions in its aftermath, Covid changed the rules of work and home by obscuring the distinction.

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