Blog: The Good, the Bad, and the Ugly: Utah’s Housing Market

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Blog: The Good, the Bad, and the Ugly: Utah’s Housing Market

By: Dejan Eskic

Note: The opinions expressed are those of the author alone and do not reflect an institutional position of the Gardner Institute. We hope the opinions shared contribute to the marketplace of ideas and help people as they formulate their own INFORMED DECISIONS™.

Last week, the Gardner Institute published our inaugural State of the State’s Housing Market report, where we analyzed how Utah’s housing market fared through the COVID-19 pandemic and shed some light on what to expect in 2022. In the few months that it took us to write the report, so much was happening that we had to restructure our outline and address new topics that weren’t initially included.

A few days before we released our report, Goldman Sachs came out with their forecast predicting national home prices will grow a further 16% by the end of 2022, citing a supply and demand imbalance.[i] However, Zelman & Associates (one of the nation’s leading housing research consultants) shared a pessimistic view on housing and is of the opinion that there is too much capital in housing and that we are overbuilt at a national level.[ii] These two opposing views by highly regarded entities highlight just how challenging the current and future housing market is.

So, where do I fall between these two “extreme” views? Somewhere in the middle, but closer to Goldman’s view. Although I think a 16% increase in national housing prices is a bit too high, we did forecast Utah’s prices to increase 5.1% in 2022. Writing this report, we looked at the market through the lens of the good, the bad, and the ugly.

The Good

We’re not in a housing bubble. In Utah, both brief and prolonged price declines have always been associated with job losses and recessions. Neither appears likely in the next two to three years. Furthermore, global and national financial conditions are much improved over the 2008–2011 period which caused the last housing bubble.

Housing was the bright spot in 2020. As the global health pandemic led to millions of job losses, construction activity and home sales hit record highs both in Utah and through the country. The appreciation in home values created approximately $70 billion in equity for Utah homeowners. Homes in forbearance are declining both nationally and in Utah. The latest state-level data (August 2021) show 2.5% of mortgages are delinquent in Utah, down from the pandemic peak of 5.6% in May 2020.[iii]

Demographic tailwinds are favorable for strong housing demand. U.S. and Utah have a significant share of the population reaching peak first-time home-buying age over the next several years. Individuals between the ages of 26 and 32 account for 9.9% (32.5 million) of the U.S. population and 10.4% (332,000) of Utah’s population. This age cohort is expected to provide a wave of first-time homebuyers, keeping the demand for housing strong for the rest of the decade

The Bad

Affordability suffered tremendously over the last 18 months or so. In the report we highlight that by the end of 2020 approximately 48.5% of Utah households couldn’t afford the median-priced home. As prices accelerated in 2021, more than half of Utah households are unable to afford the median-priced home. For renters, the path to ownership narrowed further. In 2019, approximately 63.1% of renter households were priced out of the median home price. In 2020, the share of renters priced out increased to 72.8%. The lack of affordable housing is so bad in some areas of the state that restaurant employees, and even a city planner, are living in vans temporarily.[iv]

Interest rates are trending upward from their lowest point ever. The previous fall in rates masked much of the price appreciation in 2020. While prices were increasing 16%–17%, the monthly mortgage payment was growing only 3.5%–4%. However, throughout the latter part of 2021, monthly mortgage payments are growing as fast as prices.

The Ugly

Whether we look at one quarter, one year, five years, or since 1991, Utah ranks second in home price appreciation.[v] This reflects strong population and economic growth; however, our fast growth continues to create a supply imbalance. Multiple indicators confirm Utah’s housing shortage, whether measured by the gap between new housing units and new households or “on the ground” data, such as days on market, inventory of vacant unsold new homes, and rental vacancy rates. All show record strain.

COVID-19 disrupted the supply chain for building materials—30% of construction materials are imported from China—and disrupted the availability of labor. While building permits continue to be approved, builders’ backlogs continue to grow.

The Federal Reserve distorted demand through lower interest rates and an extraordinary increase in liquidity via quantitative easing. These policies triggered high rates of demand, which in turn pushed up housing prices to record-breaking levels. As tapering is introduced, rates are expected to rise, thus adding to the affordability challenges.

As we shift into 2022, we expect Utah’s housing prices to continue to grow, albeit at a modest 5.1%. Construction activity will also grow; however, the supply and labor bottlenecks could dampen productivity. The demand for housing will remain strong, but only time will tell on which side of the Goldman/Zelman extremes the market winds will blow. I hope neither extreme becomes reality.

Dejan Eskic is a senior research fellow at the Kem C. Gardner Policy Institute.