Mortgage rates have climbed above 7% for the first time since 2001, but that’s only half the story of the affordability crisis. Years of under-building have led to a massive shortage of housing. Economists explained what’s behind the shortage and what could come next for US housing. Loading Something is loading.
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Mortgage rates are rising but that’s not the main reason buying a home is so unaffordable for many Americans.
The deeper issue is that there aren’t enough homes to fulfill every would-be buyer’s dream, which means people are competing with their wallets and driving prices higher and higher.
“There’s still this gap between demand and supply because we were underbuilding for many years,” Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors, told Insider. “So now we see demand is slowing, but it still outpaces supply.”
Mortgage rates are above 7% for the first time in over two decades for the most popular type of mortgage, and are only expected to keep rising. Meanwhile, prices are cooling in some markets. But the general sense is that the massive surge in home prices fueled by the low rates of the pandemic era hasn’t come down as fast as mortgage rates have come up.
The shortage, the economist said, can be traced back to the lead up to 2008 when US homebuilders built a surplus of inventory that dramatically outpaced demand. It led to the rate of homebuilding dipping below the historical average for the next decade. Builders overcorrected and the sector has struggled to play catch up ever since — an undertaking that has become more difficult during the pandemic.
“Home buying activity is slowing down, it’s the biggest slowdown since 2007, with eight straight months of home sale declines,” she said. “But we don’t see that in home prices.”
Builders face higher costs and supply-chain headwindsTo bring home prices back down to earth, US homebuilders would need to construct at least 1 million new residential homes.
It’s a task that Robert Dietz, chief economist and senior vice president for economics and housing policy for the National Association of Homebuilders, said is difficult to complete due to soaring costs and supply snags that are hampering construction.
“We know that higher mortgage rates price out demand across the board for both new and existing markets, but the challenge is particularly acute in new construction because you also have the run up in construction costs,” he said.
Indeed, builders are also grappling with affordability. While lumber prices have seen a sharp plunge — roughly 70% from their March 2021 highs — labor costs and expenses for other materials continue to rise. Real estate company CBRE’s Construction Cost Index forecasts a 14.1% year-over-year climb in homebuilding costs by the close of 2022.
With higher costs weighing on both demand and production, data from the US Census Bureau shows that in September, new residential construction fell by 8.1% from the prior month. So far in 2022, US housing construction has fallen in four out of nine months.
Dietz noted the slowdown is part of the reason why “we are seeing the run up in median new home prices.”
Meaningful price declines aren’t likelyFor there to be meaningful changes in affordability, Dietz suggested that the US government works with the homebuilding industry to boost supply.
“Policy makers need to focus on mending broken building material supply chains and reducing ineffective zoning and other regulatory policies to help bend the cost curve and enable builders to boost attainable housing production,” he said in a statement.
But with inflation taking center stage, officials have focused much of their energy on the economy rather than the housing market.
It’s a decision that Dietz said could result in housing supply dwindling further.
“This will be the first year since 2011 to see a decline for single-family starts,” he said. “And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues.”