Why Are Home Prices So Expensive Right Now?

There's a housing shortage in the U.S., and home prices seem to keep going higher and higher. In this Fool Live video clip, recorded on Jan. 21, Fool.com contributors Matt Frankel and Jason Hall discuss the current state of the U.S. housing market, why prices have been rising rapidly, and what investors need to know about it. 

Matt Frankel: We're going to talk about single-family housing, the state of the housing market in the U.S., something that we think maybe should be part of the conversation. Without getting political, we want to talk about something that should be part of the conversation, and just talk about where things are going and how investors can play it. First, let me just share my screen. I know Jason wanted to talk about this a little bit. This is from a real estate investment trust called American Homes 4 Rent (AMH 0.53%) ticker symbol is A-M-H. They're one of the largest owners of single-family real estate in the U.S. If you look at the chart on the top left, this is the inventory of existing homes. I know Jason looked up the current existing home inventory before the show and pretty much fell out of his seat. It's extremely low and this really puts it in context. Where is it right now, Jason?

Jason Hall: I'm going to steal the screen share. I don't even want to say it, I want to show it.

Frankel: Go for it.

Hall: I want to show it here. It's a six-digit number. Nine hundred and twenty thousand. You know what a healthy real estate market has historically been? About 2 million.

Frankel: About 2 million, yeah. Two million for context it's about six months' worth of inventory.

Hall: Let's see.

Frankel: Could you zoom out on that a little bit? I want to see when the last time it was a single-digit number was.

Hall: This is as far as the YCharts data goes.

Frankel: As far as the data has been kept, it's never been a six-digit number.

Hall: Right. That's the thing. Everybody is focusing on this year. I'm just going to show the 10-year here. Home sales have continued to rise and we've seen some fall off right at the end of the year and that kind of thing because of that inventory number. But this is the big one. This is the big one that people are focusing on is prices. Median home price in the United States is well over $350,000. It passed $360,000 briefly last year. We've seen home prices year over year go up, well, like 130 straight quarter months, something like that. Like 11 or 12 years every month, it's been right, so this is where everybody is focusing. On the price side. But I don't think there's enough focus that's being put on the supply side.

Frankel: There are a couple of good reasons for the prices. Let me steal that share back for a second. There are a couple of good reasons for the housing shortage that we're seeing.

One, a lot of people are just hesitant to sell right now. Yes, home values have risen, a lot of people have tapped into their home equity, the COVID pandemic is still alive, and well, they don't want people in and out of their homes doing showings. A lot of people are just in a wait-and-see. They can work remotely, so there's no need to move for work.

It's also been very, I don't want to say easier to buy a home, but low mortgage rates have made it more affordable than those prices Jason just showed you might indicate. If mortgage rates are at 3%, your monthly payment on the same price home is about 12% less than if it were 4%. That makes homes more affordable to people who want to take advantage of these low mortgage rates that we've seen for the past few years. That's been a big part.

Another part is if you look at that chart on the top right of your screen, the millennial generation is reaching their prime household-forming years, I would say. That has created a lot of demand that wasn't there a few years ago. The millennial generation is the biggest part of the American population by a significant margin. They are starting to reach their prime home-buying years, and another reason that I know Jason wanted to talk about, in particular, look at the chart to the bottom left, the number of single-family rental homes in America has gone from about 11 million in 2005 to about 16 million now.

Those are the number of single-family homes that are rented out and a lot more and more of this are becoming institutionally owned over time, it's still a small portion but the company that made this presentation, American Homes 4 Rent, owns about 56,000 homes another REIT called Invitation Homes owns about 80,000 homes. I think one of Jason's favorite companies, Brookfield has some single-family rentals in its portfolio.

Hall: Yeah.

Frankel: One of our favorite companies, Boston Omaha (BOC 4.34%) just started a build-to-rent home. They're starting to build a portfolio.

Hall: It's gone from a niche thing to a legit corporate strategy.

Frankel: This is becoming a big part of the housing landscape. Especially the built-for-rent trend. Homebuilders don't have a ton of capacity right now and one of my favorites, Dream Finders Homes (DFH -0.56%), their backlog is up 146% over the past year. They have roughly six quarters a year-and-a-half's worth of homes that they've sold but haven't built yet. That's a huge backlog. The fact that American Homes 4 Rent, their whole model is built-to-rent. They don't acquire homes; they build them to rent. This is why it's not only that homebuilders have low capacity, it's that a lot of their capacity is being used to build homes, specifically for companies that are just going to rent them out.