Here’s what’s driving the surge in median home prices

Lawrence Yun, National Association of REALTORS Chief Economist, joins Yahoo Finance to discuss the state of the housing market as median home prices increase and the outlook on lumber prices.

Video transcript

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KRISTIN MYERS: The housing market remains red hot, as home prices grew by the double digits in metro areas. Now, that's all according to a report from the National Association of Realtors. So let's discuss that. We're joined now by Lawrence Yun, National Association of Realtors chief economist.

Great to have you here with us, Lawrence. I feel like I get this question a lot, and so I'm going to pose it to you, as so many folks out there right now are trying to buy a home and finding that, frankly, a lot of them are unaffordable. They can't afford some of these home prices. And the biggest question I always get is why. So can you explain to us right now why we are seeing some of these home prices growing, as the report is finding, by the double digits in some cities.

LAWRENCE YUN: Well, thanks for having me on the show. The past 12 months has been quite exceptional, nothing like this in terms of 20% price appreciation in a single year. And this is happening in 90% of the metro markets. So it's not a one or two-city phenomenon, it is a nationwide phenomenon.

Why? Well, the mortgage rate hitting all-time low, so it was simply too good to pass up for some homebuyers. But we have to remember, we had a housing shortage before the pandemic, and the shortage simply exacerbated during the pandemic. So you had a strong demand, lack of supply. Well, what popped up was home prices. Now, that's a great news for homeowners, but a tremendous challenge for potential first-time buyers.

MYLES UDLAND: Well, and then I want to follow up on that. If home prices are so elevated-- we've seen some of the numbers for new sale-- new home sales, existing sales, we've seen those come off their peaks by quite a wide margin-- is it simply the case that high home-- excuse me-- high housing prices are the cure for high housing prices? And then where do you see these numbers leveling off in the future?

LAWRENCE YUN: Well, the price increase is, again, due to the housing shortage, but because of the price increases, now it is deterring buyers, especially the first-time buyers who have to come up with fresh down payment. Now, the trade-up buyers have no problem with that down payment, as they sell their home, have the equity. So this is about the first-time buyers. So home sales have been coming down, both existing and new, but it is still running ahead of the pre-pandemic condition, but it is no longer that huge surge.

And way to fix it is we have to have more supply. We need to assure that the builders can build more, possibly even utilizing some of the tax credit or existing tax benefits, like 1031 exchange, to produce more home. Now, I use a little jargon, but essentially, we want to assure that there are incentives to build more homes, because this is the only way to ensure that the first-time buyers see more moderate prices, a price leveling out, and give some chance for the income to catch up.

KRISTIN MYERS: Do you view this as a bubble at all, Lawrence?

LAWRENCE YUN: Oh, I'm not concerned with any price decline because, you know, when we look at 15 years ago, you look at the supply situation, where it was over 10 months supply, which means that it would take about 10 months to exhaust the inventory, today, we are at two, three months supply, extremely tight inventory condition. And even though some of the frenzied activity has now disappeared-- now, in some cases, we still have multiple offers, but less intense multiple offer situation now. So it's really question about the leveling off in the prices. And fortunately, we don't have those risky subprime lending, which is a good thing to assure that housing market is on firm footing.

MYLES UDLAND: Yeah, and we don't have tanning salon managers managing an inventory of five investment properties. I want to get your view on the very long term, the secular term. Let's think out to the end of the decade here. We have millennials now entering the market, as they have been for several years. Are we in a secular bull market in housing? Because I've interviewed several people who say we are. In fact, we might have some cyclical downturns. But over the next 10 years, they are seeing prices rising for the most part. What camp are you in?

LAWRENCE YUN: So in the short term, anything can happen over the short term, but over the long haul, America is one of the few countries, few advanced countries to see population increase. Last year was one of the slowest population increase, of only 2 million, but that's still adding to housing demand. And we are not even sufficiently supplying to even adequately address 2 million people, but we should anticipate that population will be rising.

The supply situation is still very restrictive. And this will not open up quickly. I mean, it's going to take several years. So someone who is buying real estate today, I think they should feel comfortable that the prices will be certainly higher. Perhaps it's a more moderate growth in the upcoming years.

And another factor is inflation. Anytime consumer price inflation begins to be much higher than normal, real estate tends to be a very good hedge against inflation. And that's another motivator as to why people are buying.

KRISTIN MYERS: Curious to know what you see right now perhaps as a catalyst that could serve to really cool this market a little bit. Is there anything out there that you're seeing that could be a risk to the housing market? Well, to its strength, I should say?

LAWRENCE YUN: The driver for the current activity is the low mortgage rates. Now, pandemic has led to greater demand in the suburbs and smaller towns, and away from the high-density downtown area. So we have seen that shift. But it's the lower interest rate that has really provided. So what happens if interest rates were to rise? Because anytime inflation becomes stubbornly high, that's going to push up long-term interest rates, and also the budget deficit.

Clearly, the country needs more infrastructure spending for bridges, the broadband access, but raising the budget deficit could also, at some point, tip the debt market such that borrowing cost rises. So the risk factor is really about higher mortgage rate, which will pull back first-time buyers. But even in that environment, I still see home prices remaining stable because we have this acute housing shortage.

MYLES UDLAND: I want to talk about input crisis-- prices, excuse me, before we go. Specifically, the price of lumber we know has spiked to $1,600, crashed to $500. Maybe that's off the table. But any supply constraints that we're seeing? You know, with the automakers, they can't get their chips. Are homemakers able to get the supplies that they need in order to construct these homes?

LAWRENCE YUN: You know, certainly there was a bit of speculation in the lumber prices, that big swing, as were, let's say, the cryptocurrency or other meme stocks. But now, the lumber prices appears to have stabilized. It is still above the pre-pandemic levels. The one big concern is the potential number of construction workers. Right now, the builders want to ramp up. They're having difficulty trying to find qualified workers.

So we need to assure that there is a-- enough people go into vocational training. Infrastructure spending will also take away some of the construction workers into building highways, but we also need to think about building more homes, because without more homebuilding, it could lead to another ramp up in home prices. And I don't think we want to see such a rapid increase. We just want to see moderate growth in the housing sector.

KRISTIN MYERS: All right. Chief economist with the National Association of Realtors, Lawrence Yun, thanks so much for joining us.