The housing market, for now, has cooled off due to the increase in mortgage rates and unfortunately, this is only going to contribute to the national shortage of homes because homebuilders are not buying land.
Experts have released data on the housing shortage as of 2020, stating that the U.S. has a shortage of 3.8 million homes. This number is expected to be in the range of 5-6 million houses by the time they release the data for 2022. The steep decline in new construction is only going to exasperate the housing needs across the country.
The biggest need areas are smaller starter homes and affordable housing rentals in and around major metro areas, specifically in the South and Western parts of the country. Rental communities made up of new single family homes and multifamily housing are being built to help boost the amount of available housing units, but it isn't at a rate to close the ever growing gap.
The housing market is at a historic crossroads. On one hand, there is more demand than ever. With a housing supply shortage north of 4 million homes, there has never been a more crucial time to build more affordable housing to meet demand. With interest rates and inflation rising day by day, the median home price is starting to come down, but the cost of owning a home continues to go up due to the rising mortgage interest rates.
On the other hand, housing markets across the country are seeing declining home prices but also a shortage in buyers who can afford the higher interest rates. Because of this, many buyers are looking to rent instead, but the rental rates are also going up with inflation and housing underproduction.
Buyers and home builders are being forced into a holding pattern until they see what the federal reserve is going to do to combat the surge of inflation. Until a solution arises, we will continue to see an increase in need for more housing so long as interest rates remain high and buyer leverage remains low. Realtors and economists alike are putting in extensive research and analysis into tracking the economy and what this means for growth and supply, especially in markets with big cities that are seeing families leaving for households in less densely populated areas.
For the last 3 years, construction companies have been devastated by the increased housing costs and labor shortages across the country. The fear of a great recession looms and the pain of the 2008 housing bubble, while over a decade old, is still fresh in their minds. To make matters worse, interest rates have created a shortage in home buyers and left them with single family homes being built with no buyers lined up. They have had to drop their prices in order to sell the units and have had to cancel agreements to buy lots for fear of building homes without buyers to sell to.
With millions of homes needed to decrease the decade long shortage, construction companies are turning to investment firms to partner in single family rental communities to continue building without creating additional risk for themselves. For example, the economic impact to a building company can be far worse when they own all of the risk and all of the upside versus having an investment company put up the money for construction and sharing the upside. This way they can partner to continue building and meeting demand with supply in the housing shortage crisis.
Home Owner/Buyer Perspective
Home prices have started to come down from their historic highs in 2021 and into the beginning of 2022. Even with the decrease in prices, inflation and interest rates are keeping most buyers on the sidelines. Many people who have existing homes are afraid to sell because they may have trouble finding a new one and the cost will be higher due to high mortgage rates. The market for selling a home is getting so poor that many home owners who have urgency to sell are turning to hedge funds and investment firms to sell their house.
There are many people who want to sell their house and many who want to buy a house, but their hands are tied similarly by the current market. Rents have skyrocketed in cities, making buyers more desperate to find a home, but with new home construction slowing, there is no where to turn. Buyers are being forced to wait for economic growth to happen to stabilize the market, holding out as long as they can to allow supply of single family homes to return.
With numbers trickling in from the census bureau, we are seeing many families leave the metro area for regions with more open space and lower home prices. Many counties and cities are currently in the process of changing the zoning of agricultural and timberlands to multi and single family zoning, allowing more land owners to sell to builders and investors in the coming years and welcoming incoming families to move to their regions. If the federal reserve can get control over the rampant inflation and bring the cost of living back down to a more affordable range for the majority of people, this will allow construction of more housing to quickly close the gap in housing shortage.
Then, once the construction of new homes begins and supply is available, prices and rents will be able to come back down to an affordable level and an effort to close the gap in the housing shortage can begin.