The US housing shortage is over (sort of)
The sector is more likely to be a source of stress next year than a catalyst for growth, even with the Fed cutting rates to support the economy
[NEW YORK] There’s good news and bad news on the US housing front: the buyers’ strike of the past three years is finally working, but the path to better affordability looks painful for many of those trying to sell a home, the construction industry and, ultimately, the US economy.
When US mortgage rates surged in 2022, it became clear that there was a shortage of housing available for buyers and renters alike, and that the rise in prices and interest rates left housing less affordable than it had been in decades. The silver lining for homebuilders was the opportunity the shortage represented. Prices stayed high, and they kept building, supporting employment and economic activity.
Fast forward to today, and it is hard to say that there is a national housing shortage anymore. The National Association of Realtors’ gauge for months of supply of existing homes for sale is near the highest in nine years. There are now more completed new homes on the market than at any time in the past 16 years. And there are more vacant rental units around than prior to the pandemic, according to online marketplace Apartment List.
Active housing inventory for sale is above 2019 levels in 14 states, spread mostly across the South and West, and including the important homebuilding states of Florida, Texas, Tennessee, Arizona and Colorado, according to Lance Lambert of ResiClub, a housing analytics site. Another six states in those regions are very close to their pre-pandemic levels. Together, the 20 account for 70 per cent of all building permits issued in the US this year.
Much of the North-east and Midwest continues to have substantially less for-sale housing available than in 2019 (blame onerous rules and demographics). But even here, we have seen modest inventory growth of anywhere between 8 per cent and 20 per cent from a year earlier.
Progress has been much slower when it comes to increased buying power, based on a mix of income growth, borrowing costs and home prices. Nationally, there has been a 10 per cent improvement in affordability from 2023’s low point, according to figures from First American Data & Analytics. But the company’s Real House Price index is still 74 per cent above the five-year, pre-pandemic average. The level of relief families are seeing depends on where they live, though.
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Economics 101 dictates that the normalisation back towards 2019 levels of affordability will continue as pricing responds to supply.
How much US house prices fall – July marked a fifth month of sequential declines nationally – will determine the stress in the construction industry, where homebuilders continue to aggressively use mortgage rate buydowns and other incentives to court buyers. To protect slumping profit margins, they are already cutting production, decreasing land purchases and laying off workers. Residential construction employment has fallen for four straight months and will likely get worse heading into the end of the year. The number of construction job openings in August fell to its lowest in eight years.
The US resale market is also concerning. Inventory levels plateaued earlier than expected this year, not because sales improved, but because there was a surge in the number of home sellers withdrawing their listings. Mike Simonsen, the chief economist at Compass, the country’s largest real estate brokerage, says that the homeowners withdrawing from the market are those who bought in recent years and do not have much or any home equity cushion. In short, they cannot afford to sell.
This is not a trivial group of people, with roughly 15 million homes sold since the middle of 2022 at elevated mortgage rate and price levels. Should labour market conditions deteriorate, we could be looking at a mini-foreclosure cycle as unemployed homeowners find themselves unable to handle mortgages they took out when the job market was strong, and they assumed they would be able to refinance at lower rates.
The big question for 2026 is how the housing market handles these pressures given what we are seeing from homebuilders and sellers. Meanwhile, frustrated would-be buyers finally have time on their side and can wait for prices to soften further. The upshot is that housing is more likely to be a source of stress next year than a catalyst for growth, even with the Federal Reserve cutting rates to support the economy.
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