The US real estate market is weird and ugly

Real estate

Economists and industry experts say understanding the real estate market requires examining a set of data that sheds light on the different pieces of the puzzle.

By Ben Casselman, New York Times Service

June 24, 2024 | 5:58 p.m.

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 buying and building more expensive , which would lead to lower demand, less construction and lower interest rates. prices.

They were right – at first. Construction slowed, but then resumed. Prices hiccuped, then resumed their advance. Higher interest rates made homes harder to buy, but Americans still wanted to buy them.

The result is a different and stranger real estate market than the one described in economics textbooks. The parts proved surprisingly durable. Other parts are almost completely seized up. And some seem perched on the edge of a precipice, at risk of collapse if rates stay high too long or if the economy weakens unexpectedly.

It is also a market marked by strong divisions. People who kept rates low ahead of 2022 have, in most cases, seen their home values ​​soar but have been protected from higher borrowing costs. On the other hand, those who were not yet homeowners often had to choose between unaffordable rents and unaffordable property prices.

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

No indicator gives a complete idea. Instead, economists and industry experts say that understanding the real estate market requires looking at a set of data that highlights the different pieces of the puzzle.

1. It’s difficult to find a house to buy.

Rapidly rising interest rates have lowered demand for housing, making borrowing more expensive. But it’s also led to a sharp decline in supply: Many homeowners are holding on to their homes longer than they otherwise would, because selling would mean giving up their ultra-low interest rates.

This “rate lock-in” phenomenon has contributed to a severe shortage of homes for sale. That’s not the only factor: Home construction lagged for years before the pandemic, and retiring baby boomers opted to stay in their homes rather than move to retirement or retirement communities. move into condominiums as many housing experts predicted.

Many economists say the lack of supply has helped keep prices high, particularly in some markets, although they disagree on the magnitude of that effect. What is certain is that for anyone looking to buy, finding a home has been extremely difficult.

2. Houses are unaffordable.

Already high housing prices have soared during the pandemic, increasing more than 40% nationally between late 2019 and mid-2021, according to the S&P CoreLogic Case-Shiller Price Index. Since then, they have risen more slowly, but they have not fallen as many economists predicted when the Fed began raising interest rates.

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

Economists have different ways of measuring affordability, but they all show roughly the same thing: Buying a home, especially for first-time buyers, is more out of reach than at any time since decades, if ever. One index, from Zillow, shows that the typical household purchasing the median home with a 10% down payment could expect to spend more than 40% of their income on housing costs, well above the 30% recommended by financial experts. And in many cities, like Denver, Austin, Texas, and Nashville — not to mention long-standing outliers like New York and San Francisco — the numbers are much worse.

3. New houses fill (part of) the void.

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 scare away buyers while making construction more expensive.

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

As a result, new home sales have remained relatively stable, even as existing home sales have fallen. Developers have particularly sought to cater to first-time buyers by building smaller homes, a segment of the market they have all but ignored for years.

However, we do not know how long this trend will continue. Many builders slowed activity when rates first rose, leaving fewer new homes waiting to hit the market in the years to come. And if rates remain high, it could become harder for builders to offer the financial incentives they have used to attract first-time buyers. In May, private developers began construction of new housing at the slowest pace in nearly four years, the Commerce Department announced Thursday.

4. Rents are also unaffordable.

Rents have soared in much of the country during the pandemic, as Americans fled cities and looked for space. Then they continued to rise, as a strong labor market increased demand.

Rising rents have helped fuel an apartment construction boom, which has brought an influx of supply to the market, particularly in Southern cities like Austin and Atlanta. This has led to rents increasing more slowly, or even falling in some areas.

But this moderation took time to find its way into the market. Many tenants are paying negotiated rents earlier in the real estate cycle, and new construction has been focused on the luxury market, which doesn’t help middle- or low-income renters much, at least in the short term.

All of this has produced a rental affordability crisis that continues to worsen.

A record share of renters spend more than 30 percent of their income on housing, Harvard’s Joint Center for Housing Studies recently found, and more than 12 million households spend 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.

5. A change may be underway.

For much of the past two years, the housing market – particularly for existing homes – has remained stuck. Buyers can’t afford to buy a home unless prices or interest rates fall. Homeowners feel little pressure to sell and are not eager to become buyers.

What could break the impasse? One possibility would be a drop in interest rates, which could bring a flood of buyers and sellers back into the market. But as inflation proves stubborn, rate cuts do not seem imminent.

Another possibility is a more gradual return to normal, as homeowners decide they can no longer postpone long-delayed moves and become more willing to make a deal, and buyers resign themselves to higher rates.

Some signs might start to occur. More and more homeowners are putting their homes up for sale and more are reducing prices to attract buyers. Builders are completing more new homes without a buyer being found. Real estate agents share stories of empty open houses and homes sitting on the market longer than expected.

Almost no one expects prices to collapse. Millennials are in the heart of the home buying years, which means housing demand should be strong, and years of underbuilding mean the country still has too few housing units by most measures. And since most homeowners have ample equity and lending standards are tight, there is unlikely to be a wave of forced sales like there was when the housing bubble burst nearly two decades.

But it also means the affordability crisis likely won’t go away anytime soon. Lower interest rates would help, but more will be needed to make homeownership seem feasible for many young Americans.

This article was originally published in the New York Times.