Why the run-up in residential home prices ends differently this time

Last week, we discussed the reasons behind the near-term slowdown in demand for storage in, What's going on with storage demand?

This week, we’re zooming out to look at the implications of the housing market as a whole on the storage industry.  One place to start our analysis is the last major housing bubble.

To rewind quickly, during the Great Financial Crisis of 2009 (GFC), there was a large increase in storage demand generated by housing foreclosures:

Source: Radius+

Very simply, if the bubble in the housing market leads to a similar outcome, while it would be painful for the economy, it could have positive implications for storage demand. But will things play out the same or differently this time? I’ve spent some time digging into the housing market to formulate a view of what I think will play out.

Here’s what I found:

On the surface, it would appear that the housing market bubble is larger than ever before and, all else being equal, a major correction is imminent:

However, there is a major difference between today’s market conditions and those in 2008-2010; in one word: supply. Although home prices (and mortgage rates) are extremely high, the supply of homes available for sale is still very low across the country (~40% lower than pre-COVID levels):

With those supply restrictions, a market correction isn’t as imminent as it might first appear. Unlike the GFC, today’s housing market is held in balance by opposing supply and demand constraints. Demand is constrained as existing homeowners are “locked” into low rates and new buyers are priced out of the market by interest rates. Supply is also constrained by those same existing homeowners’ reluctance to trade up to a 7% interest rate.

The net result is that we should have a soft landing in the housing market and should not expect the same or even similar market outcomes as we experienced during the GFC.

The eventual reduction in interest rates should keep these two market forces in balance while simultaneously providing a tailwind to the self-storage industry. As rates decrease, storage demand will rebound as buying and moving activity accelerates and the market returns to normalcy.