The Weird Housing Market, in 5 Charts

The Weird Housing Market, in 5 Charts

Real estate prices have held up better than expected given the high interest rates. But that doesn’t mean the real estate market is healthy.

When the Federal Reserve began raising interest rates in 2022, most economists assumed that the housing market would be the first to suffer the consequences: Higher borrowing costs would make buying and building more expensive, leading to lower demand, less construction, and lower prices would lead.

They were right – at first. Construction slowed but then picked up speed. Prices faltered and then continued their upward trend. Higher interest rates made it harder to afford homes, but Americans still wanted to buy them.

The result is a real estate market that is different and stranger than the one described in economics textbooks. Parts have proven to be surprisingly resilient. Other parts are almost completely blocked. And some appear to be teetering on the edge, at risk of crashing if interest rates stay high for too long or the economy unexpectedly slows.

It is also a market with strong divisions. In most cases, people who secured low interest rates before 2022 saw their home values ​​jump but were spared higher borrowing costs. Those who did not yet own property, on the other hand, often had to choose between unaffordable rents and unaffordable property prices.

But the situation is nuanced. In some parts of the country, homeowners face skyrocketing insurance costs. Rents have fallen in some cities. Builders are looking for ways to make new homes affordable for first-time buyers.

No single indicator tells the whole story. Rather, economists and industry experts say understanding the real estate market requires looking at a range of data that sheds light on different pieces of the puzzle.

The rapid rise in interest rates depressed demand for housing and made borrowing more expensive. But it also led to a sharp decline in supply: many owners are keeping their houses longer than usual because selling them would mean foregoing the extremely low interest rates.

This “tariff lock” phenomenon has contributed to a severe shortage of homes for sale. But that’s not the only factor: Home construction had been lagging for years before the pandemic, and retired baby boomers were choosing to stay in their homes rather than moving into senior living communities or downsizing into condos, as many homebuilding 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 extent of the effect. What is certain is that finding a home has been extremely difficult for anyone who wants to buy.

According to the S&P CoreLogic Case-Shiller Price Index, already high home prices skyrocketed during the pandemic, rising more than 40 percent nationwide from late 2019 to mid-2021. They have risen more slowly since then, but have not fallen as many economists expected when the Fed began raising interest rates.

Rising interest rates have made these prices even more unaffordable for many buyers. Someone buying a $300,000 home with a 10 percent down payment could expect to pay about $1,100 a month on a mortgage at the end of 2021, while interest rates on a 30-year fixed-rate loan were about 3 percent . Today, with interest rates around 7 percent, the same home would cost about $1,800 per month, a nearly 60 percent increase in monthly costs. (This doesn’t even take into account the rising costs of insurance or other expenses.)

Economists measure affordability in different ways, but they all show broadly the same thing: Buying a home, especially for first-time buyers, is more out of reach than at any time in decades, or perhaps ever before. An index from Zillow shows that the typical household that buys the average home at a 10 percent discount can expect to spend more than 40 percent of its income on housing costs, significantly more than the 30 percent that financial experts recommend. And in many cities like Denver, Austin and Nashville — not to mention long-time outliers like New York and San Francisco — the numbers are much worse.

Perhaps the most surprising development in the real estate market over the past two years has been the resilience of new home sales.

When interest rates rise, developers typically struggle as high borrowing costs deter buyers while making construction more expensive.

But this time, with so few existing homes for sale, many buyers have turned to new construction. At the same time, many large home builders were able to borrow when interest rates were low and were able to use that financial clout to “buy down” interest rates for their customers, making their homes more affordable without having to lower prices.

As a result, new home sales remained relatively stable, although existing home sales declined sharply. Developers have particularly sought to appeal to first-time buyers by building smaller homes, a market segment they have all but ignored for years.

However, it is unclear how long this trend can last. When interest rates first rose, many builders withdrew, meaning fewer new homes came onto the market in the coming years. And if interest rates remain high, builders could find it harder to offer the financial incentives that have attracted first-time buyers. The Commerce Department said Thursday that private developers broke ground on new homes in May, the slowest pace in nearly four years.

During the pandemic, rents skyrocketed across much of the country as Americans fled cities and looked for housing. Then they continued to rise as the strong job market increased demand.

Rising rents helped fuel the housing boom, which has led to a flood of supply in the market, particularly in southern cities like Austin and Atlanta. This has resulted in rents rising more slowly or even falling in some places.

But this moderation has been slow to take hold in the market. Many tenants are paying rents negotiated earlier in the housing cycle, and new construction is concentrated in the luxury market, which doesn’t help middle- or low-income renters much, at least in the short term.

All of this has created a rent affordability crisis that continues to get worse. A record share of renters are spending more than 30 percent of their income on housing, Harvard University’s Joint Center for Housing Studies recently found, and more than 12 million households are spending more than half of 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 for many households earning more than $75,000 a year.

In the last two years, the housing market – especially for existing properties – has largely been stuck. Buyers can’t afford homes unless prices or interest rates fall. The owners feel little pressure to sell and are not eager to become buyers.

What could solve the traffic jam? One possibility is lower interest rates, which could bring a flood of buyers and sellers back into the market. However, with inflation proving stubborn, rate cuts do not appear to be imminent.

Another possibility is a more gradual return to normality, as owners decide they can no longer put off long-delayed moves and are more willing to close a deal, and as buyers come to terms with higher prices.

There are signs that this may be starting. More and more owners are putting their homes up for sale and more are lowering prices to attract buyers. Builders are completing more and more new homes without finding a buyer. Real estate agents tell anecdotes of vacant open houses and homes staying on the market longer than expected.

Hardly anyone expects a price drop. The Millennial generation is at the heart of the property buying years, meaning demand for homes is likely to be strong and years of under-construction mean there are still too few homes in the country by most measures. And because most homeowners have plenty of equity and lending standards are strict, there is unlikely to be a wave of forced sales like the one that occurred when the housing bubble burst nearly two decades ago.

But that also means the affordability crisis is unlikely to resolve itself any time soon. Lower interest rates would help, but it will take more than that to make homeownership feel attainable for many younger Americans.

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2024-06-20 18:12:32