The Federal Reserve’s half-point drop in the prime rate this month and the likelihood of more rate cuts to come this year may have bolstered the hopes of would-be home buyers. However, it will take more than lower rates to solve the nation’s housing crisis. It may take legal action.
The law of supply and demand dictates almost all prices and the housing market is no exception. The economic maxim states that prices rise or fall based on supply and consumer demand. In today’s housing market, the low supply of houses and high demand for them have resulted in higher housing prices. However, there are more cynical forces at work.
We did not get into this situation overnight and it will take time to get out of it.
Origins of the Housing Crisis
The housing market and home building industry has never recovered from the Great Recession.
The longest post-World War II economic slump, the Great Recession is generally agreed to have started in December 2007 and lasted through June 2009. Some of its most consequential events include the failure of Lehman Brothers, the fourth-largest investment bank at the time, and the bursting of the housing bubble.
In the three years running up to the Great Recession, the housing market’s mantra seemed to be “build baby build.” Loan applications appeared to be a mere formality, down payments were not strictly necessary, interest rates were low and bank reserve requirements were lower.
Prior to the downturn, homebuilders started about two million houses a year. To say that number dropped when the housing bubble burst is an understatement. In addition, new home starts have never recovered.
To make matters worse, the demand for housing continues to grow while the supply lags far behind.
Housing Not Keeping Up
Earlier this year, real estate marketing firm Zillow released a report that highlighted the growing housing deficit. It found that the housing shortage had grown from 4.3 million the year before to 4.5 million by the end of 2022. That is despite the fact that new home construction that year was better than any year since the Great Recession.
Over 1.4 million new homes were built in 2022. However, at the same time, 1.8 new families were created.
“The simple fact is there are not enough homes in this country, and that’s pushing homeownership out of reach for too many families,” said Orphe Divounguy, senior economist at Zillow. “The affordability crisis extends to renters as well, with nearly half of renter households being cost-burdened. Filling the housing shortage is the long-term answer to making housing more affordable. We are in a big hole, and it is going to take more than the status quo to dig ourselves out of it.”
Traditional thinking, voiced by many in the housing industry, says that zoning laws and other regulations impede the construction of single-family homes and apartment buildings. Indeed, many single-family housing developments have been built and sold with the guarantee that apartments would be banned from such neighborhoods.
However, some research indicates that lifting zoning regulations does not result in accelerated building activity.
Not Always a Supply Problem
An article this month in the Harvard Review argues that the market power of developers and landlords are also a contributor to high housing costs.
A case in point is the actions of RealPage. A property management software firm, RealPage is alleged to have combined with landlords in major markets to hike profits in a way that limited occupancy.
The U. S. Justice Department, joined by eight states, the District of Columbia, and class action attorneys, has filed lawsuits against RealPage.
The conventional model for apartment management aims for 100 percent occupancy at the highest rent the market will bear. However, RealPage, the lawsuits allege, persuaded competing landlords to raise rates in unison and accept lower occupancy rates. That way, the RealPage pitch went, the landlords could realize greater profits with lower occupancies. That collusion may have increased the landlord’s bottom lines. However, it left families and individuals who needed housing literally in the cold.
Owning Cheaper Than Rent
The combination of escalating rents and reduced mortgage rates is making home ownership more affordable, according to Zillow.
Monthly rent for a house or apartment is typically $2,063 a month, reports Zillow. Conversely, a typical mortgage is $236 a month cheaper at $1,827. Of course, homeownership also requires payments for insurance, taxes, maintenance, and repairs.
“This analysis shows homeownership may be more within reach than most renters think,” said Divounguy. “Coming up with the down payment is still a huge barrier, but for those who can make it work, homeownership may come with lower monthly costs and the ability to build long-term wealth in the form of home equity — something you lose out on as a renter. With mortgage rates dropping, it’s a great time to see how your affordability has changed and if it makes more sense to buy than rent.”
Looking Ahead
The average fixed rate on a 30-year mortgage is currently 6.22 percent, according to Bankrate. That rate has been below 7 percent since June.
Further rate cuts will lead to lower mortgage rates. That will put more families in a position to buy a home.
The good news is that the Federal Reserve Bank has indicated it will slash rates further in the near term. However, it may take more cuts over a longer period to move the housing market significantly.
Many homeowners, who might sell to upgrade or downsize, are hunkered down in the comfort of ultra-low mortgage rates. Rates would have to take a deep dive to make selling financially sound for these people.
“I don’t expect to see a meaningful increase in the supply of existing homes for sale until mortgage rates are back down in the low 5% range, so probably not in 2024,” Rick Sharga, founder and CEO of CJ Patrick Company, a financial advisory firm, told Forbes.
Although 2024 may not be the year the dam breaks in the housing market, it may be the year cracks begin to show.
Zillow reports that the number of homes on the market is up 22 per year over year. The firm also sees home sales growing modestly. Zillow says 4.1 million homes will sell by the end of this year. Further, it expects 2025 to see 4.3 million home sales.
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