High interest rates and economic headwinds are making it difficult for the United States to fill an acute shortage of affordable housing, and the problem is likely to get worse.
The Federal Reserve has been working for months to stem the impact of inflation by raising interest rates and slowing the housing market. As a result, home sales and construction plummeted off a cliff this summer.
New and existing home sales also declined for months in a row after the Federal Reserve raised mortgage rates. But experts say these price increases, along with supply shortages and historically low inventories, will only exacerbate shortages.
“With mortgage rates on the rise, it has put a lot of buyers off the fence and into the rental market because they simply can’t afford the mortgage payments,” Daryl Fairweather, chief economist at Redfin, said in an interview Thursday.
Fairweather said mortgage payments for a median-priced home are up nearly 50 percent from a year ago.
“A lot of buyers can’t afford it. They either cut their housing budgets or go to the rental market,” she said.
Existing home sales have fallen for five straight months, according to data released this week from the National Association of Realtors, and are down 14.2 percent over the past 12 months. While prices have begun to fall in some of the country’s hottest local housing markets, the median home price still rose to $416,000 in June, up 13.4 percent from a year ago.
“We are seeing more and more people exit the housing market as these rates either continue to climb or stay at this higher level than what we have seen over the past two years,” said Yelena Maleyev, an economist at KPMG. In an interview on Thursday.
The Fed, perhaps unexpectedly, is making home purchases more expensive now in hopes of eventually making them cheaper. The bank has raised interest rates significantly since March, bringing the average 30-year mortgage rate to 5.5 percent in June, according to Freddie Mac.
The Fed’s rate hikes are aimed at slowing home sales by increasing the cost of mortgages. With fewer buyers able to afford higher prices, sellers will eventually be forced to lower their prices.
Maliev said the drop in home sales will eventually lead to lower home prices, which is one of the Fed’s higher rate targets. The Fed also hopes to curb the economic activity that comes with home sales and push homeowners to spend less money as their homes fall in value. Combined, these factors should help reduce pressure on prices throughout the economy, leading to lower inflation.
The higher rates aim to bring home prices down after more than a decade of steady annual increases. The COVID-19 pandemic has also unleashed increased demand for housing while federal stimulus efforts – including ultra-low interest rates – have led to a rapid increase in both sales and prices.
The number of new American families exploded in 2021 as COVID-19 vaccines triggered a rapid recovery, up 2.3 million from pre-pandemic levels, according to a report by ApartmentList.com.
But high interest rates will likely prevent homeowners from building enough homes to meet those needs. The pandemic itself put home construction on hold for several months, then created a series of supply and labor shortages, delays, delays, and obstacles to completing homes on budget and schedule.
“Builders are now thinking that demand will begin to decline, especially because of these unsustainable prices,” Maleyev explained.
“At the same time, they are still facing the same hurdles they faced before – long lead times, supply chain bottlenecks, inflation in their inputs, labor shortages, land shortages,” she continued.
Next week, the Fed is preparing to raise interest rates by another 0.75 percentage points, the second increase of that size in two months. As a result, the move from the central bank will raise mortgage rates.
The bank has already raised interest rates by 1.5 percentage points since March, and is likely to raise at least 1 percentage point by the end of the year.
It may be difficult for federal policymakers to boost the housing supply because housing markets are typically shaped by state and local regulations, many of which make it difficult to build affordable homes, Maleyev and Fairweather said.
President Biden’s plan, which was scrapped, “Build Back Better”, included more than $200 billion aimed at boosting the supply of affordable homes and getting rid of restrictive zoning laws, but provisions will likely expire with the rest of the package at the end of the year.
A bill to reverse a sharp decline in immigration to the United States, which could help fill a labor shortage in homebuilding, is unlikely to pass into law given the deep partisan divisions on the issue.
“People left the construction industry and never came back [after the 2008 recession]which contributed to labor shortages,” Fairweather said.
“We are now in a situation where housing has become so expensive and land has become so expensive that it is very expensive to build.”