Over the last 5 or so years, the American dream of buying a home has taken a hit, as a combination of factors, which we will explore, have combined to push house purchases out of reach for many American families. To be clear, this is a bigger global phenomenon that affects not just the US, but much of the English-speaking world, as families in Australia and Canada are facing the same issue. Unfortunately, we don't have an easy solution, but we do have a fairly clear picture of why it has happened.
First up, there is simply more demand for housing than there was even five years ago, because of demographic forces. After flatlining from 2007-2017, the population of Americans aged 25-54 has grown by 2.5 million. Perhaps more importantly, the number of Americans thinking they can actually buy a home and move out of their parents' basement now that they have finally found work is even greater. Since April 2020, 16.5 million more Americans aged 25-54 have a job and are likely looking for a place to call their own.
While demand has grown, supply has barely kept pace and has even shrunk depending upon the metric you use. There are several factors at play here. For one, institutional buyers now own 3% of US houses and more like 15% in some Sun Belt areas. Two, existing homeowners have locked in much lower mortgage rates and are reluctant to sell and have to start a new mortgage at double their locked-in rate. Some states, notably California, have many NOT-IN-MY-BACKYARD (NIMBY) zoning rules which thwart new development. Finally, supply chain disruptions, labor shortages, and higher material costs have made building more expensive.
Below we show the level of US Housing starts, which are presently close to their long-term average near 1500, but well below 2008 peaks.
While some new houses are being built, existing homes are simply not being sold, and the inventory, as you can see in the next chart, is at multi-decade lows.
Active real estate listings are off their lows, but barely. There are just not that many houses available.
With fewer houses on the market, sales of existing homes and new homes remain anemic and near historic lows.
Finally, anything and everything associated with home ownership has shot up in price.
As you can see in the next chart, assuming you wanted to simply buy a lot and build from scratch, the cost of building a home has risen by more than 40% since Covid because of higher material costs.
Even if you can buy or build a new home, insurance premiums are up 10% over the last 2 years. In some states, like Florida and California, insurance companies are skyrocketing their premiums or withdrawing altogether due to climate issues like hurricanes and forest fires.
Finally, mortgage rates have doubled under a Federal Reserve policy designed to rein in inflation, making financing a home that much more prohibitive.
The end result: US housing prices are also up 42% since Covid hit in April 2020, the biggest jump since the housing bubble.
This confluence of higher demand, lower supply, and inflated costs has made the dream of home ownership the least affordable in almost 40 years.
How will this problem resolve itself? We don't know exactly. But there are a couple of likely paths. First, the most likely outcome is that we have a normal recession at some point. This means people will lose their jobs, which will lessen housing demand, and it will also force the Fed to lower rates, which will make mortgage rates and borrowing to buy a house more reasonable again. We should add the caveat that housing prices are not likely to crater in this scenario. There is no bubble of bad leverage underlying the current run-up in home prices. Second, if the labor market stays tight, we may have wage inflation at some point which, assuming housing prices move little, would mean people have higher incomes. The third and least attractive option is that housing prices simply stay high and out of reach for many young Americans. The generation that can't afford a house will either choose to rent and put their savings in more liquid assets like stocks, bonds, and cash, or buy a smaller home than they would like, and spend less on other items like vacations and better cars. Another possibility is that the migratory trend we saw in COVID may continue. The part of the labor force who are capable of working remotely will choose to leave the Northeast and California and take up residence in more affordable parts of the country, even if it means taking a pay cut. Finally, we may see more housing supply come online, though this would take time.
Data Sources: Bloomberg, FRED
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