Beyond Supply And Demand: Today’s Tech Is Helping House Prices Skyrocket
Increased housing market entropy
[An earlier version of this piece appeared in Forbes.com.]
Falling interest rates and the pandemic are the top two reasons for house prices skyrocketing over the last year and a half but there’s another reason no one talks about.
Today’s technology simply makes it easier for house prices to increase when buyer demand increases. If house prices are indeed more sensitive to increases in demand, it would make house prices higher but also more unstable.
The huge house price increases in the 2020s were started by mortgage interest rates falling from 4.9% in November 2018 to 2.7% in December 2020. By the end, with the same monthly principal and interest payment, house buyers could borrow 30% more money so they were bidding up house prices along the way. Prices really took off in the summer of 2020 after mortgage interest rates had been falling steeply for over a year and a half.
Covid-19 changed the market, as well, of course. A lot of that was also based on new technology. Zoom and similar technologies made work-from-home a lot more practical for some people and some of them bought houses farther from work or bought second homes because they could spend more time at their second homes with work-from-home.
A lot of other factors were also at play, including a hot stock market so a lot of people had a lot more money to move up to better homes or to buy second homes.
House prices had a huge amount of upward momentum going into 2021 and then, at the same time, Covid-19 deaths took off. They peaked in January 2021.
Many potential house sellers delayed putting their houses up for sale so the number of houses hitting the market tanked at the exact same time sales were soaring after two years of falling mortgage rates.
On top of the two main reasons, the overlooked reason for skyrocketing house prices was the huge amount of technological change that had occurred in the house buying process since the last house price boom in the 2000s.
Potential house buyers today have so much information at their fingertips about the market and about individual houses they can make buying decisions more quickly and, in addition, it’s just a lot easier to make an offer to buy a house today.
The mechanics of the home buying process are far faster than during the 1980s real estate boom or during the 2000s real estate boom. That increased speed amplified the increases in demand that came from the lower rates and pandemic changes in demand.
That speed is equivalent, in a way, to having more buyers because it becomes more likely a house will get multiple offers when it first hits the market. And when it's so easy to make offers, potential buyers can make a lot more offers on a lot more houses before they get discouraged, give up and stop making offers.
Economists would say modern technology has lowered the transaction costs of buying a house. Today’s quicker offers lead to higher prices and those higher prices contribute in a feedback loop to even higher prices.
Some prominent economists have said housing prices are driven largely by what people expect house prices to be in the future. When prices have increased a lot in the past, some buyers expect them to continue increasing fast in the future so they’re willing to pay more and that can cause house prices to rise without any new changes to the fundamentals of supply or demand. House prices are determined by supply, demand, and what buyers think future house prices will be (although, officially, price expectations influence demand).
Clearly, last year house prices skyrocketed because of falling interest rates and Covid-19, but the technological change was also likely an important factor—a factor that will continue into the future long after the influences of record-low mortgage rates and Covid-19 are gone.
The House Buying Process: 1980s Boom
Pre-internet, multiple listing services (MLS) printed books of the houses listed for sale. MLS books were like mini-telephone books. They were printed every month or so with perhaps six houses listed on each page with no photographs, just text.
Buyers often first met with their real estate agents at their agent’s office. They went through the MLS book together, page by page, and selected the houses to see in person.
The buyer’s agent would call the sellers’ agents for the selected houses and try to arrange showings. Because the MLS book was only printed every month or so, it was not unusual for some of the selected houses to already be under contract or to have already sold. The MLS book was the best information available but it was old.
After a buyer found a house they wanted to buy, their agent would draft an offer. The buyer and agent would meet in person so the buyer could sign the written, paper offer. In some areas, it was common for the buyer’s agent to then meet with the seller and the seller’s agent in person, at the seller’s house, so the buyer’s agent could present the written offer.
Any later counter-offers were signed in ink and hand-delivered to the other agent.
If a buyer lived out of state, the offers and counter-offers typically had to be mailed back and forth for signatures.
Buyers had extremely little information on house prices, only what they could pick up from reading the newspaper, talking to friends and neighbors, visiting open houses, and touring houses with their real estate agents.
Investors were almost all local mom-and-pop investors. Out-of-state investors were at a disadvantage in that time-intensive system. Large investors focused on developing new residential real estate projects.
The House Buying Process: 2000s Boom
By the 2000s MLS books were gone and had been replaced by online MLS websites for real estate agents (only). The information available to agents was far more up-to-date, more detailed, and often included a few photographs of each house.
A buyer and agent might meet over the phone and the buyer would tell the agent what they were looking for. Then the agent would search the MLS for houses that met the buyer’s criteria, email the MLS listings for the selected houses to the buyer to review, arrange the showings, and show the houses to the potential buyer.
Buyers still typically signed offers in person using “wet” signatures but fax machines were common which made it much easier to work with buyers who had access to a fax machine at work. People rarely had fax machines at home.
Fax machines were especially helpful with out-of-state buyers. The agent could just fax the documents to a Kinko’s or a similar business near the out-of-state buyer’s home. The buyer could pick up the faxed offer or counter-offer, sign it and fax it back. It was much faster, cheaper, and more convenient than overnight mail.
Back then, instead of hand delivering signed offers or counter-offers to the other agents, real estate agents pretty much just sent all documents to each other via fax which sped up making offers and buying houses.
In addition, buyers had a ton more information about house prices in general during the 2000s boom than during the 1980s boom. Sold prices were starting to be available online. Starting in 2005, for example, Zillow showed the prices of houses that had recently been sold, and Zillow estimated the value of most houses. Zillow did not yet have MLS houses for sale on their website.
Investors were still mostly mom-and-pop investors (local and out-of-state) but the number of small speculators took off toward the end of the boom because lenders would lend them money with no money down, no proof of income, and so on. It seems some institutional investors were a lot more likely to invest in the new, cutting-edge, high-interest rate (high-risk) mortgage products instead of directly buying single-family houses. Wall Street still considered single-family houses a mom-and-pop investment.
Large investors started to buy single-family houses during the bust that followed the 2000s boom. More and more data was becoming available about the real estate market in general and about the individual houses for sale, and a few large, national investors scaled up their purchases based on using that data to determine which houses to buy.
The House Buying Process: 2020s Boom
By the 2020s the typical house in the MLS had dozens of photos, sometimes videos and most of the information was online for all potential buyers to see, it was not just for real estate agents to see, anymore.
Today, buyers often know a lot more about the real estate market because of all the information online. Now buyers often just tell their agents which houses they want to see instead of asking their agents to find houses that meet their criteria.
A critical technology change has been electronic signatures which have become the standard since the 2000s boom. The buyer and real estate agent can now discuss over the phone what to put in the offer and have the offer drafted, signed (electronically over the internet), and submitted to the seller’s agent in as little as one hour.
No more arranging to meet the buyer in person after they get off work so they can sign an offer with pen and ink. What often took a day, can now take an hour.
In addition, the amount of information house buyers have today is phenomenally more than during the 2000s boom. Potential buyers can find tons of information online about the general real estate market, individual houses for sale, and sold prices.
In the 1980s boom, when a buyer overpaid–it happens–it didn't move the market like today. The only people who knew about it were the local real estate agents and maybe some neighbors. Now, every potential buyer can see the sold price and some may think it's fair market value.
Also, with so much information available online about houses for sale and sale prices, potential buyers may not need to see as many houses in person before they feel confident enough to make an offer.
Although investors were still mostly mom-and-pop investors in the 2020s boom, institutional buyers jumped into the market big time during the second half of 2021. A lot more data was available to out-of-state institutional investors this time around which allowed them to develop new evaluation techniques which made them feel confident enough to buy huge numbers of single-family houses for rentals.
The House Buying Process: Beyond Supply And Demand
House prices skyrocketed since the summer of 2020 not just because of low mortgage rates and the pandemic, but also, to some degree, because house buyers can evaluate the market and individual houses faster, and the mechanics of making offers is a lot faster. That makes it more likely sellers will get multiple offers, that houses will sell over list price, and that house prices, in general, will increase.
And there appears to be a weird behavioral economics thing going on here where, after losing out on a few bidding wars, some buyers want to win at any price. It's a bit of unintentional gamification of the house buying process but without any Robinhood.
Forever More Sensitive To Increases In Demand
The supply and demand may eventually go back to pre-pandemic levels but there’s no going back to MLS books and fax machines.
It appears likely house prices will forever be more sensitive to increases in demand and the real estate market will forever be more prone to booms. Due to today's house buying technology, whenever there’s an increase in demand (or decrease in supply), prices will increase faster and more than they would have in the 1980s or 2000s given the same increase in demand (or decrease in supply).
What about busts? Will the real estate market also be forever more prone to real estate busts? That’s uncertain. A faster sales process may make fast markets faster but may not make slow markets slower.
But, on the other hand, in the same way, today’s ocean of information may have shortened the amount of time it took some potential buyers to adjust up their expectations for future house price appreciation in 2020 and 2021, today’s ocean of information may shorten the amount of time it takes some potential sellers to adjust down their expectations for future house price appreciation.
The old, less efficient systems tended to slow down house price increases and that also slowed down expectations for future price increases, how much buyers were willing to pay, and house price increases in general.
Is increasing housing market efficiency unintentionally also increasing housing market instability and entropy? Probably.
The critical question right now, however, is whether our current systems will slow down or speed up house price decreases when the demand for single-family houses eventually falls from its current heights.
Yes, with the mass automation of data - pricing of stocks, RE, art, etc. is quicker than ever. Yet, will this also lead to quicker downturns...we shall see!
The stock market acts/reacts quicker than ever with 90%+ of trading automated. March 2020 the index lost nearly 50% of its value within weeks and only recovered after Powell of the Fed guaranteed WS an unlimited source of funds...aka a piggybank with no limits! Basically, the US govt. took over most of the US economy beginning in March 2020...as they did back in 2008...when will we get back to a free market economy again?
How long this extreme boom-bust cycle can continue...who knows?!
How it will affect RE when the piggyback has limits again...we shall see!
Interesting read. It seems that you're well balanced but that you're leaning at least slightly toward technology facilitating booms more than busts. If that's true, the question of sustainability and connection to fundamentals emerges for me as it always does with respect to other writing on asset bubbles. I also wonder if the speed itself insulates against poor decisions making. I don't think it does and the stock market demonstrates this well, I think. This in turn brings me back to the sustainability question. Appreciate your thoughts.