The US housing market is weird and ugly
Higher rates made homes harder to afford, but Americans still wanted to buy them
WHEN the Federal Reserve began raising interest rates in 2022, most economists thought the housing market would be the first to suffer the consequences: Higher borrowing costs would make it more expensive to buy and to build, leading to reduced demand, less construction and lower prices.
They were right – at first. Construction slowed, but then picked up. Prices hiccuped, then resumed their upward march. Higher rates made homes harder to afford, but Americans still wanted to buy them.
The result is a housing market that is different, and stranger, than the one described in economics textbooks. Parts have proved surprisingly resilient. Other parts have seized up almost completely. And some seem perched on a precipice, at risk of tumbling if rates stay high too long or the economy weakens unexpectedly.
No one indicator tells the full story. Rather, economists and industry experts say understanding the housing market requires looking at an array of data shedding light on different pieces of the puzzle.
1. It’s hard to find a home to buy
The rapid rise in interest rates pushed down demand for housing, by making it more expensive to borrow. But it also led to a big drop in supply: Many owners are holding onto their homes longer than they would otherwise because selling would mean giving up their ultralow interest rates.
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This “rate lock” phenomenon has contributed to a severe shortage of homes for sale. It isn’t the only factor: Home building lagged for years before the pandemic, and retired baby boomers have been choosing to stay in their homes rather than moving to retirement communities or downsizing to condominiums as many housing experts had expected.
Many economists argue that the lack of supply has helped keep prices high, particularly in some markets, although they disagree about the magnitude of the effect. What is certain is that for anyone hoping to buy, finding a home has been extremely difficult.
2. Homes are unaffordable
Home prices, already high, soared during the pandemic, rising more than 40 per cent nationally from the end of 2019 to mid-2021, according to the S&P CoreLogic Case-Shiller price index. They’ve risen more slowly since then, but they haven’t fallen as many economists expected when the Fed started raising interest rates.
Rising interest rates have put those prices even further out of reach for many buyers. Someone buying a US$300,000 house with a 10 per cent downpayment could expect to pay about US$1,100 a month on a mortgage in late 2021, when interest rates on a 30-year, fixed-rate loan were about 3 per cent. Today, with rates at about 7 per cent, that same house would cost about US$1,800 a month, nearly a 60 per cent increase in monthly costs. (That doesn’t even take into account the rising cost of insurance or other expenses.)
3. New homes are filling (some of) the gap
Perhaps the most surprising development in the housing market over the past two years has been the resilience of new-home sales.
Developers typically struggle when interest rates rise, because high borrowing costs drive away buyers while also making it more expensive to build.
But this time around, with so few existing homes available for sale, many buyers have been turning to new construction. At the same time, many big builders were able to borrow when interest rates were low, and have been able to use that financial firepower to “buy down” interest rates for customers – making their homes more affordable without needing to cut prices.
As a result, sales of new homes have held relatively steady even as sales of existing homes have plummeted. Developers have especially sought to cater to first-time buyers by building smaller homes, a segment of the market they all but ignored for years.
4. Rents are unaffordable, too
Rents skyrocketed in much of the country during the pandemic, as Americans fled cities and sought space. Then they kept rising, as the strong labour market increased demand.
A record share of renters are spending more than 30 per cent of their income on housing, Harvard’s Joint Center for Housing Studies found recently, and more than 12 million households are spending more than half their income on rent. Affordability is no longer just a problem for the poor: The Harvard report found that rent is becoming a burden even among many households earning more than US$75,000 a year.
5. A shift may be underway
For much of the past two years, the housing market – especially for existing homes – has been stuck. Buyers can’t afford homes unless either prices or interest rates fall. Owners feel little pressure to sell, and aren’t eager to become buyers.
What could break the logjam? One possibility is lower interest rates, which could bring a flood of both buyers and sellers back to the market. But with inflation proving stubborn, rate cuts don’t appear imminent.
Another possibility is a more gradual return to normal, as owners decide they can no longer put off long-delayed moves and become more willing to cut a deal, and as buyers resign themselves to higher rates.
Hardly anyone expects prices to collapse. The millennial generation is in the heart of the home-buying years, meaning demand for homes should be strong, and years of under-building mean the country still has too few homes by most measures. And because most homeowners have plenty of equity, and lending standards have been tight, there isn’t likely to be a wave of forced sales as there was when the housing bubble burst nearly two decades ago.
But that also means that the affordability crisis isn’t likely to resolve itself soon. Lower rates would help, but it will take more than that for homeownership to feel achievable to many younger Americans. NYTIMES
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