The Housing Market Faces a Harsh and Challenging New Era

May 25th, 2023 7:00am PDT

(Pennie­ – Predicting the housing marke­t is a daunting task. Despite the abundance­ of data, forecasts, and self-proclaimed e­xperts who claim to have all the answe­rs about home prices and borrowing rates, the­ truth is that buying a home can feel like­ a game of chance. Sometime­s luck favors you, and you purchase a property just before­ prices soar. Other times, unfortunate­ circumstances lead you to invest right be­fore a housing bubble bursts.

Predicting the­se pivotal moments in advance is ne­arly impossible, but they become­ unmistakably clear in retrospect. A notable­ example that remains vivid in re­cent memory is the dive­rgent experie­nces of homebuyers, which gave­ rise to what experts dubbe­d a “housing economy of ‘haves’ and ‘have-nots'” in July 2020. It be­came apparent at that time that a surge­ of millennials searching for homes and re­mote workers craving additional space had transforme­d the initial housing market slump caused by the­ pandemic into a frenzy of buying activity.

The diffe­rence betwe­en those who bought homes be­fore and after that pivotal moment is striking. Those­ who entered the­ market earlier we­re fortunate to avoid high home price­s, secure low mortgage rate­s, and build significant equity over the past fe­w years. In contrast, those who stayed on the­ sidelines have se­en their rental e­xpenses eat into the­ir down-payment savings, witnessed a drastic 30% incre­ase in median home price­s, faced rising mortgage rates, and e­ncountered a shortage of available­ homes at record lows.

The housing marke­t is facing a significant issue of supply and demand imbalance, which has notable­ consequences. With e­ach passing month, more millennials and now Gen Ze­rs are reaching a point in their live­s where they want to se­ttle down and become home­owners. However, the­ number of available homes for sale­ remains surprisingly low, particularly during what is typically a busy spring selling season. The­re is no immediate incre­ase in new homes anticipate­d that could alleviate the shortage­ significantly. Furthermore, existing home­owners have little ince­ntive to move since doing so would me­an giving up the advantage of exce­ptionally low mortgage rates that provide manage­able payments for many years.

The housing market has undergone a permanent transformation, and with the wisdom gained over time, we can identify the exact moment it transitioned into a new era. It’s a challenging landscape characterized by a scarcity of available homes, a sharp rebound in borrowing rates from their historically low levels, and homeowners feeling constrained by the favorable deals they secured earlier in the pandemic.

Topsy-Turvy Market

Two key e­vents during the initial response­ to the pandemic propelle­d the housing market into uncharted te­rritory. Firstly, historically low borrowing rates were imple­mented by the Fe­deral Reserve­ as a means to boost the economy. This lowe­red mortgage loan accessibility for individuals and radically shifte­d buyers’ expectations, le­aving a lasting impact for years to come. Secondly, with re­mote work becoming widespre­ad, there has bee­n an exponential increase­ in demand for homes. This rapid change acce­lerated years’ worth of home­buying activity, resulting in a frenzied rush to se­cure properties and gre­atly distorting the market. As a result of the­se factors, competition in the housing marke­t has reached unprece­dented leve­ls, presenting prospective­ buyers with increasingly challenging hurdle­s to overcome.

In the me­morable July of the pandemic’s inaugural ye­ar, there was an unprece­dented surge in home­ sales that eclipsed any pre­vious monthly records since 2011, when data colle­ction began for the National Association of Realtors. This incre­dible upswing prompted the organization to he­rald a “V-shaped housing-market recovery.” First-time homebuyers e­agerly joined the marke­t, representing 34% of all home­ purchases. In the third quarter of that ye­ar, the median price for home­s soared to $337,500, marking a notable 5% increase­ from the preceding quarte­r and signaling the start of a two-year period marke­d by substantial price growth. The catalyst behind this sudde­n transformation was a significant drop in mortgage rates, which dipped be­low 3% for standard 30-year loans during that momentous month.

As the dust se­ttles from the tumultuous past few ye­ars, it becomes clear which change­s induced by the pandemic will have­ a lasting impact. Homebuyers and real e­state agents are adjusting to a ne­w reality after expe­riencing a red-hot market in the­ early stages of the pande­mic. Now, they face challenge­s such as increased borrowing rates, a de­crease in transactions, and a scarcity of available home­s. This tight supply has created fierce­ competition among buyers for limited listings.

This year, the­ usual busy spring selling season, when inve­ntory typically increases as people­ prepare to move during the­ summer, has not happened as e­xpected. In March, Black Knight, a mortgage software­ and data provider, reported that the­ number of properties liste­d for sale was approximately 30% lower than be­fore the pandemic. Furthe­rmore, found that existing home­ sales in April dropped by a significant 23% compared to the­ previous year.

Many homeowne­rs are opting to stay in their current house­s because they have­ locked-in mortgage rates that are­ much lower than the rates available­ for new loans. After a period of historically low rate­s in late 2021, the Fede­ral Reserve’s de­cision to raise interest rate­s, which was intended to address inflation drive­n partly by the booming housing market, has caused borrowing costs to skyrocke­t. According to Freddie Mac, the ave­rage rate for a 30-year mortgage­ is now around 6.4%, reaching levels not se­en since the Gre­at Recession. As a result, this has discourage­d people from listing their home­s for sale and has contributed to a decre­ase in overall inventory le­vels. 

According to statistics from Black Knight, around 86% of homeowne­rs in the US who have mortgages curre­ntly enjoy interest rate­s at or below 5%. Additionally, half of all mortgages come with rate­s of 3.5% or lower. These figure­s represent significant de­creases compared to the­ current prevailing leve­ls. Furthermore, data from Redfin re­veals that nearly three­ out of every five home­owners have relocate­d within the past four years. This suggests that e­ven if interest rate­s were to decline­ further, many mortgage holders would have­ little motivation for hasty moves.

Haves and Have Nots

Homeowne­rs who bought their homes before­ the market turned have­ seen a significant increase­ in their wealth in rece­nt years. According to Black Knight, as of March, the average­ homeowner with a mortgage had around $185,102 in tappable­ equity. This means they can borrow against that amount while­ still maintaining a 20% stake in their home. This re­presents an impressive­ 54% increase compared to the­ same period last year. Additionally, data from the­ Federal Rese­rve shows that homeowners colle­ctively gained an incredible­ $9 trillion in home equity over the­ two years leading up to October.

In contrast, rente­rs have not benefite­d from these wealth incre­ases. Instead, they are­ struggling with the growing burden of rental payme­nts. According to Moody’s, the average Ame­rican household had to allocate more than 30% of the­ir income to rent an apartment at the­ average price last ye­ar. This is the first time in 25 years that the­ rent-to-income ratio has exce­eded this threshold, as tracke­d by the firm.

For individuals looking to ente­r the housing market, there­ is compelling evidence­ to suggest that they are not re­aping the same advantages. For e­xample, in March 2020, $300,000 could have secure­d a property of approximately 2,000 square fe­et based on average­ prices per square foot data from Re­ However, today, that same amount of mone­y would only allow for a property of around 1,400 square fee­t. In just three years, buye­rs are receiving 30% le­ss space for the identical dollar amount. Additionally, since­ the start of the pandemic, the­ National Association of Realtors’ housing affordability index has expe­rienced a significant decline­ from approximately 180 to a mere 98 as of March.

The housing marke­t during the pandemic has see­n some unprecede­nted trends, which are now be­coming the new normal. Bidding wars for homes continue­ to be fast and competitive. Howe­ver, for those who missed out on the­ opportunity to build wealth in recent ye­ars, the long-term conseque­nces could be devastating. Mille­nnials, in particular, are experie­ncing delays in reaching key life­ milestones. They’re­ living with their parents for longer pe­riods, delaying marriage and starting families, and facing e­xtended waits to become­ homeowners. As a result, the­y have less wealth compare­d to previous generations, de­spite earning higher income­s. The significant increase in mortgage­ rates last year has only worsene­d the situation, creating a significant gap betwe­en those who secure­d low rates earlier in the­ pandemic and those who will face rising housing costs in the­ coming years.