The rise in home prices since the onset of COVID-19 is without recent historical precedent. Based on the Case-Shiller Index, home prices grew by 34% in the two years since February 2020, which is the strongest growth over any two-year period of the index since its inception in 1987. Various explanations have been offered, including supply shortages, demographic trends as Millennials age into their prime homebuying years, economic stimulus, low mortgage rates, and the rise of remote work arrangements. Two recent studies have shed some light on the last item of that list, suggesting that remote work has been a critical factor behind the historic levels of home price appreciation.
Last year two researchers from the University of Stanford, Arjun Ramami and Nicholas Bloom, observed that in metro areas, the prices of homes in suburbs and exurbs were rising much faster than those closer to city centers.1 The so-called “donut effect” tracked closely with migration patterns away from central business districts since the start of the pandemic. As a result, suburbs saw “price growth divergence from their city centers of almost 15 percentage points” by early 2021. Ramami and Bloom find that the donut effect is much stronger in the largest metro areas than in mid-sized or smaller metros. This result likely points to greater availability of work-from-home opportunities in larger cities, and more expensive housing in their core areas. While Ramami and Bloom find strong evidence of within-metro migration, they find little evidence of migration between metro areas.
Earlier this year, researchers from the Federal Reserve Bank of San Francisco and the University of California San Diego, John Mondragon and Johannes Wieland, used a different approach to investigate the impact of remote work on residential home prices.2 They studied patterns in remote work adoption since the start of the pandemic at the metro level as reported in the Census Bureau’s American Community Survey and compared them with home price growth in those areas. Consistent with Ramami and Bloom, Mondragon and Wieland find that cities with larger increases in remote work rates pre- and post-pandemic saw higher home price appreciation. As of the end of 2021, Mondragon and Wieland estimate that remote work explains over half of the total rise in home prices since the end of 2019.
One effect of this pattern is in relocating residential construction. Many observers have bemoaned the slow response of home builders to complete new inventory. However, aggregate data may miss the ways in which builders are addressing areas in greatest need. According to the National Association of Home Builders, over the two years ending in December 2021, residential construction was stronger in suburban and outlying areas than in metro cores.3 This was particularly true of multifamily housing, where for large metro areas, construction in outlying areas was up 27% versus December 2019 compared to just 14% in cores. Similarly, small metros saw a 58% increase in outlying areas versus 34% growth in metro cores.
These findings have implications for credit unions. First, it should ease fears of a residential housing bubble poised to burst. As Mondragon and Wieland put it, “Our results suggest that the increase in house prices over this period largely reflect fundamentals rather than a speculative bubble.” Credit unions that serve suburban areas, and especially those that make loans to finance multifamily residential housing, stand to benefit. There is already some evidence that credit unions have capitalized on the donut effect; commercial loans outstanding for multifamily housing have grown by over 60% since the end of 2019.
If remote work truly does explain so much of recent housing market dynamics, it requires any housing market forecast to wrestle with future developments in remote work. If present arrangements hold, price growth should return to a more normal level as construction in outlying areas catches up with the one-time jolt in demand. But the recent surge in prices could retrace itself if businesses ultimately reject or scale back on remote work. Alternatively, if emerging employers focusing on full-time rather than hybrid remote work succeed, there could be another shock to the housing market as workers find greater freedom to move between metros rather than simply within them.
Ramani, Arjun and Bloom, Nicholas, The Donut Effect of COVID-19 on Cities (May 22, 2021). Available at SSRN: https://ssrn.com/abstract=3850758 or http://dx.doi.org/10.2139/ssrn.3850758
Mondragon, John and Wieland, Johannes, Housing Demand and Remote Work (May 2022). NBER Working Paper No. w30041, Available at SSRN: https://ssrn.com/abstract=4110744https://www.nahb.org/news-and-economics/housing-economics/indices/home-building-geography-index