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What's Up with the Housing Market? - Episode 52 Thumbnail

What's Up with the Housing Market? - Episode 52

What's up with the housing market, and how is there a housing shortage? I answer these questions on Episode 52 of Retire Your Way Radio. 

Listen to Episode 52 Here:

You can listen online through the direct player above, or a much easier way to listen is by subscribing to the podcast through a free podcast app on your phone.  The podcast is available on iTunes, Spotify, Google Podcasts, iHeartRadio, Stitcher, and several others!

The Housing Shortage Problem

I’m going to start with some information from an article published by The Atlantic called The U.S. Needs More Housing Than Almost Anyone Can Imagine.

It’s no secret that there is a shortage of affordable housing in some of the most productive cities in the United States. Large cities on both coasts have been hit the hardest, including Washington D.C., New York City, Boston, and San Francisco.

This is largely because new housing construction is not keeping up with the demand for housing in these areas.

This demand comes from population growth, job growth, and new household formation.

Household formation can happen for several reasons, but one example is kids growing up and moving out of their parents’ house.

Having abundant housing in big cities would likely create a more productive and vibrant U.S. economy. 

How Did This Happen?

Let’s look at California as an example. In the 1960s, 70s, and the start of the 80s, California built between 200,000 and 300,000 homes per year. However, during the most recent economic boom, they built about 100,000 homes per year.  

As another example, New York City issued fewer new housing permits in the 2010s than it did in the 2000s or even in the 1960s. In fact, year after year, the city has created more jobs than homes.

However, it’s not just the West Coast and the Northeast that are experiencing housing gaps.

The National Association of Realtors looked at 174 metro areas across the U.S. and compared the number of new housing permits with the number of jobs created.

  • They found that only 38 metro regions are issuing enough new homes permits to keep up with job growth. 
  • However, in more than a dozen areas, only 1 new home is built for every 20-plus jobs created.

Home building is not keeping up with job growth in several metro areas across the country.

Who is Affected?

Housing affects so many sectors throughout the economy - mortgages, banks, insurance, contractors, construction - almost everything is somehow affected by housing.

The following groups of people have been the hardest hit by the housing gap:

  • Workers who don’t have a college degree
  • Families with children
  • Elderly couples on fixed incomes
  • Extended families living in the same household

The housing gap has also caused people to make difficult decisions.

Millions of families don’t live where they want to or in the kinds of homes they want to, or even with the people they want to in order to keep their housing costs in line with their income.

When a third bedroom costs too much, parents may give up on having a third child.

Rising prices have forced millions of younger Americans to delay owning a home and even live with their parents longer than they intended.

According to statistics, renters are feeling the high cost of housing.

  • 47% of renters in the U.S. are considered “burdened” because they spend more than 30 percent of their income on rent and utilities.
  • About 25% of renters spend more than half their income on shelter.
  • Renters today spend about 10% more of their earnings on housing than they did in the 1970s.

Having more housing available would help to reduce rents and sales prices in nearby neighborhoods.

The opposite is also true. When building is restricted, prices increase. (Think supply and demand.)

Solution: Build More Homes

So how many homes must be built to make the most expensive cities affordable for middle-class and working-poor families again? 

According to Freddie Mac, there is a nationwide supply shortage of 3.8 million units when looking at the number of American households and the number of vacant housing units. This has been driven by a collapse in the construction of homes smaller than 1,400 square feet over the past 40 years.

A separate study from Up for Growth also reached a shortage estimate of 3.8 million units based on the total demand for housing and the overall supply of livable, available units.

However, these homes are not going to drop out of the sky today or even be built in the next year, so we can’t expect to see an immediate effect on home prices and rents.

It took years to get to our current housing gap and it will take years to get out of it.

Current Housing Market

The Federal Reserve raised the federal funds rate seven times in 2022 and again in February 2023. These actions can be clearly felt in the housing sector since most U.S. home purchases involve mortgages.

Here are some stats compiled by Goldman Sachs regarding home sales and mortgages for early 2023:

  • Home sales are down 37% compared to last year.
  • Listing prices have been reduced on 6% of active listings, which is up from 2% a year ago.
  • Mortgage purchase applications were down 41% in January compared to last year.
  • January sales prices were 11% lower than their June peak, although they were up 1% compared to last January.

And here are a few more numbers for you:

  • A $400,000 mortgage at 2.75%, which is where rates were in 2021, is $1,600 per month.
  • And a $250,000 mortgage at 6.75%, which is approximately where rates are today, is $1,600 per month.
  • Home prices would have to decline by over 37% for the same monthly payment!

So, we have a housing shortage, but homes have become much less affordable than they were just a couple years ago.  

The magic question is: What’s going to happen with housing?   

Bottom Line

Well, the housing market may be volatile for at least the next few months, if not years, due to volatile and higher mortgage rates, reduced prices, limited housing supply, and an underlying strength in employment and wages.

So, I hope you locked in a cheap mortgage a couple of years ago, but if you must purchase, do it and hope that mortgage rates come back down over the next few years and you can refinance.


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