Is Covid to blame for high housing costs and taxes?

Covid first appeared over six years ago. The most devasting pandemic in the country in a century, Covid left scars and impacts on millions of people and numerous parts of the economy.

One of those impacts has been on the housing market.The claim has been made that Covid’s impact has led to affordability issues for homebuyers and tax issues for homeowners. I will provide the information for this claim and let you decide.

Let’s first review Covid’s history. Covid caught the country by surprise when it first appeared in January 2020.  As the virus rapidly spread, unprecedented measures were taken.  Wearing masks, limiting social interaction, and closing many businesses, schools, and other social activities were ordered.  Supplies of everyday products rapidly declined. Businesses worried about paying their employees, and households stressed about paying their bills.

Just like addressing the health crisis caused by Covid, the economic crisis required national actions by the federal government for two reasons. First, Covid was a national crisis. Second, only the federal government has the resources to address national crises.

Two parts of the federal government were used in rescuing the economy. The first was the President and Congress approving legislation to fund relief programs. The second was the Federal Reserve – the nation’s central bank – creating money and causing interest rates to fall.

The efforts were massive.  In 2020 and 2021, under two different Presidents and Congresses, $5.1 trillion was injected into the economy to help households spend and businesses make payroll. Over the same time period, the Federal Reserve, which has powers to influence interest rates and private spending, slashed their key interest rate to effectively 0% and pumped $6 trillion of cash into the economy. As a result, although the Covid recession was severe with unemployment hitting almost 15%, the economy began recovering after only two months.

Yet there were some major adverse consequences, particularly in the housing market. With 30-year fixed mortgage rates below 3%, the lowest rate in modern history, and many households flush with savings from federal Covid assistance programs, there was a surge in homebuying after the pandemic. Yet during the pandemic, home building declined.  The result was a mis-match between buying and selling. More households wanting to buy the limited supply of homes meant the price of homes shot up. Between 2020 and 2022, home prices rose 41%.  Using Federal Reserve data, since 2022 home prices have bounced up and down, with little trend.

It wasn’t just home prices that rose, it was almost everything. The overall annual inflation rate, which captures all consumer prices, rose from just over 1% in 2020 to almost 7% in both 2021 and 2022. This caused the Federal Reserve to shift course and fight inflation by increasing their policy interest rate. Consequently, most private interest rates also increased, including mortgage rates which climbed to over 7%.

The conclusion is the situation homebuyers have recently faced, with high housing prices and high mortgage rates,  had its beginning during Covid. And while mortgage rates are now lower than their recent high, it usually takes a major financial crisis, such as occurred in 2008, for big pullbacks in housing prices to occur.

It can be argued Covid created an equal challenge for many homeowners. Homes are considered a financial asset, and as a result owners are periodically taxed on the asset’s value.  In North Carolina the taxing authority is the local county. And while the taxing authority can adjust the tax rate lower to ease the pain from a higher home value, the average North Carolina homeowner has seen a 27% increase in their property tax bill since 2019, almost three times higher than the increase in average household income.

This situation has led to proposals to make adjustments in the North Carolina property tax, such as limiting the annual increase in the tax payment to a certain percent. Some states are actually talking about eliminating the property tax. But it should be remembered that in most states, including North Carolina, property taxes are the major revenue source for local governments, funding a variety of functions including education and public safety.

Is the culprit behind issues both homebuyers and home owners have been facing in recent years summed up in one word, Covid? You decide

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.