More money is being spent on real estate than ever before. Through the second quarter of 2021, the total value of residential real estate transactions was over $600 billion for the third time in the past year, for a total of $750 billion. Figure 1 shows the total transaction value by quarter since Q1 2000. It has been steadily on the rise since 2010 but has recently taken a particularly sharp upswing. Recent totals easily exceed the previous peak of $568 billion in Q3 2005.
Figure 1: Total Value of Residential Real Estate Transactions (Millions)
Figure 2: Total Count of Residential Real Estate Transactions
The value of transactions has skyrocketed despite sales volumes continuing a relatively normal growth trend. Sales are still below what they were during the 2000s boom. In Q1 2021, $750 billion was spent on 1.91 million transactions, substantially less than the 2.22 million transactions in Q3 2005. Figure 2 shows the full series of residential sales counts. Although the current numbers are the highest in recent years, they were far exceeded in the years prior to the great recession.
The recent surge is mostly due to an increase in prices. As of June 2021, the S&P CoreLogic Case-Shiller Index was 41% above its peak value in 2005. However, this does not explain the surge in total sales value. Inflating 2005 prices to 2021 levels would still bring the current total to $680 billion. Why don’t the numbers line up? The answer lies in where homes are being sold now vs. 2005.
Figure 3: Zip Code Price Ratios
Figure 3 shows representation ratios for high-priced and low-priced ZIP codes using CoreLogic public records data. Representation ratios measure how over or underrepresented a location is in sales relative to what share of the housing stock it represents1. The representation ratio is the share of total sales in a ZIP code divided by its share of the residential housing stock2.
In the 2000s, around the time of the boom, lower priced areas were overrepresented relative to higher priced areas, reflecting the number in subprime mortgages at the time. Figure 3 shows that over the last year, sales have moved to higher priced areas. This is most likely reflecting the move to less dense areas, and more spacious homes that can facilitate home office work. The upshot of this is that the value of the real estate transactions is up not only because of prices, but also because sales have moved to more expensive areas.
The combination of appreciation and relocation to expensive areas has already created over 1.25 trillion in transactions through the first half of 2021. Could 2021 be the first year that transactions surpass $2 trillion? Prices are forecasted to slow down, but not fall, and sales are generally expected to increase as supply shortages abate, so it most likely will3. However, with so much pressure on prices, it is likely that the price difference between low and high house priced places will grow large enough that sales will eventually reorientate themselves to lower priced areas. If that happens fast enough, we could end up with more sales and higher prices in the back half of 2021, but less money spent in total, because the transactions are happening in less expensive places.
1 For instance, if there were only 2 ZIP codes, one with 5 houses and another with 10, and in 1st quarter 1 house sold in the first zip code and 4 houses sold in the second. The representation ratio for the first would be (1/(1+4))/(5/(5+10))= (1/5)/(1/3) = 0.6 and the second would be (4/(1+4))/(10/(5+10))= (4/5)/(2/3) = 1.2. If a ZIP code’s sales are an accurate representation of its stock, then the ratio is 1. Overrepresented ZIP codes have a ratio above 1 and underrepresented ZIP codes have a ratio below 1.
2 For instance, if there were only 2 ZIP codes, one with 5 houses and another with 10, and in 1st quarter 1 house sold in the first zip code and 4 houses sold in the second. The representation ratio for the first would be (1/(1+4))/(5/(5+10))= (1/5)/(1/3) = 0.6 and the second would be (4/(1+4))/(10/(5+10))= (4/5)/(2/3) = 1.2. If a ZIP code’s sales are an accurate representation of its stock, then the ratio is 1. Overrepresented ZIP codes have a ratio above 1 and underrepresented ZIP codes have a ratio below 1.
3 If we do not restrict ourselves to calendar years, the $2 trillion point has already been surpassed. In the 12 months from June 2020 through June 2021 the total value of transactions was $2.25 trillion.