Industry Round-Up: Rising Home Prices, Influx to High Climate Risk Areas, and GHG Emissions from Housing

Welcome to our industry news round-up, where we cover the latest real estate trends and location insights.

Home prices are rising again despite a temporary decline caused by high mortgage rates and low housing supply.

Home prices are back on the rise. High mortgage rates drove a few months of price declines, but the effect of low supply has re-asserted itself. 

Despite extremely low inventory, even high rates aren’t enough to deter buyers. The affordability crisis can only be addressed with more housing stock.

Source: Calculated Risk

The graph above plots housing inventory (inverted, y-axis) against month-over-month home price growth (x-axis). As the upward-sloping cloud of red dots indicates, low inventory drives higher home prices. The black triangles represent months over the past year during which the relationship temporarily broke down as high rates kept most sellers and buyers out of the market.

But households need shelter. And households are beginning to realize that mortgage rates today aren’t high by historic standards, and they’re unlikely to drop in the near term. This is what led to the U-turn evident in the red arrow, which indicates a surge back to positive home price growth after the initial decline.

Therefore, high rates aren’t having a big enough impact on home prices to affect inflation or affordability. Despite the Fed’s focus on the former, the latter is still relevant, as low inventory and unaffordability combine to blunt the Fed’s effectiveness in tackling shelter inflation. 

It takes about 12-18 months for current home and rent prices to show up in the CPI, so the return to positive home price growth we’re seeing now will mean shelter inflation will actually accelerate in about a year, regardless of what happens to home prices between now and then. Therefore, CPI-measured inflation will remain well above the Fed’s classic 2-handle target for the foreseeable future.

The lack of housing supply growth negatively impacts everything from household well-being and affordability to inflation and economic dynamism.

The surge in population to high climate risk areas in the Sunbelt raises concerns about housing and employer response.

In 2021 and 2022, almost 400,000 more people moved into flood-prone counties than out — a 103% increase from the previous two years. The U.S. is also experiencing massive in-migration to areas with the highest fire- and heat-related risks.

Source: Redfin

The maps show that the rapidly increasing household and real estate risks are concentrated in the Sunbelt, especially along the Florida, Southeast, and Gulf coasts — places where household and employer in-migration has been high. 

All the dots on the map are areas with high climate risk, with the color indicating an increase (green) or decrease (red) in population and the size indicating the size of the increase or decrease.

It’s not just people who are moving — the supply of housing options is also tilting in increasingly riskier directions. 

According to Redfin, “55% of homes built so far this decade face fire risk while 45% face drought risk. By comparison, only 14% of homes built from 1900 to 1959 face fire risk and 37% face drought risk. New homes are also more likely than older homes to face heat and flood risk.” 

Some regions, such as Louisiana, are already facing a crisis as insurance premiums and other living costs rise due to climate risks.  What differentiates Louisiana from some of these other high-risk places is the concentration of jobs — not a difference in physical risk. 

Therefore, the big question is when employers start to move in response to rising risks and costs.

The MSCI analysis on GHG emissions from housing is misleading due to omitted factors like home size and resident transportation emissions.

Source: MSCI

GHG emissions from housing vary widely by region. 

Only focusing on Scope 1 (heating and cooking) and Scope 2 (electricity consumed), the Midwest stands out as the worst, according to this analysis by MSCI. However the latter has several gaps that make it a bit misleading.

First, the analysis ignores home size by examining electricity usage per square meter of living space. This decision hides the enormous impact of home size on emissions. Larger homes require more electricity to power, heat, and cool. And we know that home sizes vary across states, as well. This post by Visual Capitalist ranks states by median home size, showing that the median home size in the Midwest is generally smaller than that in places like Utah, Colorado, Idaho, etc.

Second, MSCI omits residents’ transportation emissions by excluding Scope 3 (upstream and downstream emissions) from its analysis. The location of a home (i.e. its proximity to amenities, workplaces, schools, transportation options, etc.) impacts how much driving a household will do. Average vehicle miles traveled per household varies enormously across states, as shown in this Green Car Progress article. Again, states in the Midwest are not the worst offenders in terms of emissions.

MSCI deserves credit for trying to quantify housing emissions — too often discussions of real estate emissions focus on commercial buildings, ignoring residential properties. However, for the analysis to be more meaningful, it needs to account for key factors such as home size and transportation.

Reducing living space per inhabitant, rather than materials switching, is a more effective way to decrease embodied carbon emissions.

A reduction in living space per habitant is more likely to decrease embodied carbon in the residential sector than materials switching. Not to mention the reduction in materials needed for building and maintaining urban infrastructure that will result from increased residential density.

Source:  Building and Environment

Figure 1 (top left) is from a recent paper by Aldrick Arceo, Shoshanna Saxe, and Heather MacLean. It emphasizes the simple but crucial point that building smaller will mean using less, which will have a big impact on the amount of embodied GHG emissions produced by the residential sector. Too much attention has been placed on things like materials switching, leading us to overlook the size factor.

Figure 2 (bottom right) makes it clear that there are a lot of low-hanging fruits in the home-size bucket. Since 1975, living space per habitant has nearly doubled in the U.S.

As countries like Canada ramp up their immigration targets, the number of new homes built per year will accelerate. Building smaller and denser needs to be a part of the solution if we hope to expand access to housing and address the affordability crisis.