The softening of real estate prices in the hottest pandemic markets only confirms that the surge in remote work created the illusion of a housing shortage

Business Insider

Nov. 22, 2022


While some housing experts have maintained that a dearth of inventory and record-low mortgage rates were to blame for the intense competition and runaway home price growth seen during the pandemic, Erin Sykes, chief economist for luxury brokerage firm Nest Seekers International, says there is another culprit afoot: remote work. 

"I'm not convinced there is a housing shortage, more so a mismatch of housing types and locations," she told Insider.

"The housing 'shortage' will correct itself as it is not based on population growth and real demand, but in low interest rates, a shift in desirable locations and the work from home combined with outsized salaries in mid-tier markets," she added.

According to Sykes, an irregular distribution of home buying activity "is being misinterpreted as a shortage." That's because she believes that remote work increased "the demand for trendy locations," leading more homebuyers and large institutional investors — typically deep-pocketed businesses and real estate funds —  to saturate home buying hotspots.

"Everyone wanted to move to the same hot markets at the same time," she said. "Places like Palm Beach, Miami, Austin, Nashville and the Hamptons. It felt like an 'all or nothing' scenario for a couple years."

As transplants moved into these hot markets, data from the Federal Reserve Bank of San Francisco shows their presence led to higher home prices. By tracking migration and its effect on home demand, the San Francisco Fed found that from November 2019 to November 2021, the surge in remote work alone lifted home prices 15% and accounted for more than 60% of the overall increase in home values nationwide.

Changing tides in the hottest pandemic markets

In Austin, which was the nation's most popular home buying migration destination in early 2021, the influx of new buyers led to heavy investor activity in the market. By year's end, the median home price in the city grew by 31%, leading to more residents either becoming renters or homeless. But now Austin is now also witnessing one of the nation's most dramatic drop in prices

"Institutional and individual investors were aggressive in the purchase of property over the last couple years, and as prices held steady while rates increased, many would-be buyers were forced to rent," Sykes said. "Thus, it's not that there is a shortage of inventory, it's that the bulk of the inventory is held by just a few players."

However, this could all soon change as the Federal Reserve's aggressive fight against surging inflation results in far lower buyer demand, slower sales and home price growth — all of which are dampening investor activity.  

According to an October housing report from ATTOM, institutional investors nationwide accounted for only 6.7% of housing inventory in the third-quarter of 2022 — down from the 8.4% seen in Q3 of 2021.

"Gross profits, and overall ROI are still relatively healthy for investors who don't overpay for homes, and who are good at managing repair costs, but if demand weakens further and prices begin to decline, returns for investors could definitely be impacted,"  Rick Sharga, the executive vice president of market intelligence at ATTOM, told Insider in June. As homebuyer and investor activity fades, and more employers call workers back into the office, Sykes says the so-called housing shortage could be on its last leg.

"Buyers have begun to expand their search beyond the red hot geographies into sub markets where affordability is better," she said. "This reshuffling of demand will solve the 'shortage.'"



Erin Sykes
Erin Sykes
Licensed Associate Real Estate Broker (FL, NY & NJ), Nest Seekers Chief Economist, LEED AP