The Strange Housing Market, in 5 Charts

Home prices held up better than expected amid rising interest rates. But that doesn’t mean the housing market is healthy.

When the Fed 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 it more expensive to buy and build, leading to lower demand, less construction and lower prices. .

They were right – at first. Construction slowed, but then rebounded. Prices faltered and then resumed their upward march. High interest rates have made it difficult to buy homes, but Americans still want to buy them.

The result is a housing market that is different and stranger than that described in economics textbooks. The parts have proven surprisingly flexible. Other parts were almost completely captured. Some appear to be on the brink, at risk of collapse if interest rates remain high for too long or if the economy weakens unexpectedly.

It is also a market with stark divisions. People who held low interest rates before 2022 had their home values ​​rise in most cases, but they were insulated from higher borrowing costs. On the other hand, those who did not already own were often forced to choose between unaffordable rents and unaffordable house prices.

But the situation is delicate. Homeowners in some parts of the country face very high insurance costs. Rents have moderated in some cities. Builders are finding ways to make new homes more affordable for first-time buyers.

There is no single indicator that tells the whole story. Instead, economists and industry experts say understanding the housing market requires looking at a range of data that sheds light on different pieces of the puzzle.

1. It is difficult to find a home to buy.

The rapid rise in interest rates reduced demand for housing, making borrowing more expensive. But it has also led to a significant reduction in supply: many owners are holding on to their homes longer than they otherwise would, because selling means giving up extremely low interest rates.

This “price fixing” phenomenon has contributed to the severe shortage of homes for sale. It’s not the only factor: Homebuilding was delayed for years before the pandemic, and retiring baby boomers have chosen to stay in their homes rather than move into retirement communities or downsize to condominiums as many housing experts had predicted.

Many economists believe that the lack of supply has helped keep prices high, especially in some markets, although they disagree on the size of the effect. What is certain is that for anyone who wanted to buy, finding a home was very difficult.

2. Homes are unaffordable.

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

High interest rates have put these prices out of reach 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 their mortgage in late 2021, when interest rates on a 30-year fixed-rate loan were about 3 percent. Today, with interest rates at about 7 percent, the same home would cost about $1,800 per month, nearly a 60 percent increase in monthly costs. (And this doesn’t even take into account the higher cost of insurance or other expenses.)

Economists have different ways to measure affordability, but they all show pretty much 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. One indicator, from Zillow, shows that a typical family who buys the average home with a 10 percent down payment can expect to spend more than 40 percent of their income on housing costs, much higher than the 30 percent recommended by financial experts. 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 housing market over the past two years has been the resilience of new home sales.

Developers typically suffer when interest rates rise, because higher borrowing costs turn away buyers while making construction more expensive.

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

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

But it is not clear how long this trend can continue. Many builders pulled back when interest rates first rose, leaving fewer new homes in the pipeline to hit the market in the coming years. If prices remain high, it may become difficult for builders to offer the financial incentives they used to attract first-time buyers. Private developers in May began construction on new homes at the slowest rate in nearly four years, the U.S. Commerce Department said Thursday.

4. Rents are also unaffordable.

Rents have skyrocketed in much of the country during the pandemic, as Americans fled cities in search of space. They then continued to rise, as a strong labor market increased demand.

Rising rents have helped fuel an apartment building boom, which has led to an influx of supply into the market, especially in southern cities like Austin and Atlanta. This has led to rents rising more slowly or even falling in some places.

But this moderation has been slow to make its way through the market. Many renters are paying rents that were negotiated earlier in the housing cycle, and new construction is concentrated in the luxury market, which does little to help middle- or low-income renters, at least in the short term.

All of this has led to a rental affordability crisis that is getting worse. a Record share of tenants They spend more than 30% of their income on housing, the Harvard Joint Center for Housing Studies recently found, and more than 12 million households spend more than half their income on rent. Affordability is no longer just a problem for the poor: a Harvard report found that rent has become a burden even among many families earning more than $75,000 a year.

5. A transformation may be underway.

For most of the past two years, the housing market — especially for existing homes — has been stuck. Buyers cannot afford homes unless prices or interest rates fall. Owners feel little pressure to sell, and are not eager to become buyers.

What could break the stalemate? One possibility is lower interest rates, which could lead to a return of buyers and sellers flowing into the market. But with inflation proving stubborn, interest rate cuts do not appear imminent.

Another possibility is a gradual return to normal, as owners decide they can no longer postpone long-awaited moves and become more willing to make a deal, and as buyers capitulate to higher interest rates.

There are signs it may be starting to happen. More owners are listing their homes for sale, and more are lowering prices to attract buyers. Builders are finishing more new homes without a buyer lined up. Real estate agents share tales of empty open houses and homes that stay on the market longer than expected.

Hardly anyone expects prices to collapse. Millennials are in the midst of their homebuying years, which means demand for homes should be strong, and years of incomplete construction means the country still has too few homes by most measures. Because most homeowners had a lot of equity, and lending standards were strict, there was unlikely to be a wave of forced sales as occurred when the housing bubble burst nearly two decades ago.

But it also means that the affordability crisis is unlikely to resolve itself soon. Lower rates would help, but it will take more than that for homeownership to become achievable for many younger Americans.