Why Is the Housing Market So Tight?

It may come as no surprise if you have been in the market for a new home that housing supply is currently at its lowest level since the 1970s.

“In my time studying housing markets, I’ve seen bubbles and I’ve seen busts,” says Bill McBride, an economist who predicted the 2007 housing crash. “But I’ve never seen anything quite like this. It’s a perfect storm.”

The questions on a lot of people’s minds are what caused this housing shortage, and when will it end? Perhaps more importantly, how will it end? Will it look like 2007 which led to one of the largest economic meltdowns our country has ever seen?

According to an article in The Atlantic, years of insufficient building and a construction pause during the pandemic led to low inventory. Seniors, who in previous decades sold their homes to downsize, are now more likely to “age in place,” which is keeping millions of homes off the market. The emergence of the Millennial generation made strong housing demand in the early 2020s entirely predictable. And The Great Recession’s clobbering of the construction industry made today’s housing shortage equally foreseeable.

And according to Freddie Mac, the U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand.

Can Homebuilders Normalize the Housing Market?

If there aren’t enough resale homes to meet the demand shortage, can homebuilders save the day? The short answer is they are trying to, but they have been dealt their own spectrum of challenges. A decreased labor shortage, Covid backlog of building permits, dramatically rising land and building supply costs have all resulted in a slower pace of building which is not as robust as the market demands. Although there are positive signs with increased housing starts, the U.S. housing supply has been underbuilt for well over a decade and it will take years of accelerated new home construction to close the gap.

And a potentially painful new twist has been added, about 47% of contractors added escalation clauses to home contracts last month, according to an April survey by the National Association of Realtors. The clauses let firms raise selling prices as building costs rise. Buyer’s fears of being gouged or not being able to qualify for a mortgage once the home is actually finished could majorly slow down this sector again.

What About Foreclosures That Are Sure to Flood the Market?

This seems like an obvious question to ask, especially after the Covid related downturn in our economy where scores of Americans lost their jobs and/or income. Fortunately or unfortunately depending on your perspective, foreclosures won’t have a meaningful impact on overall supply. According to Goldman Sachs, pandemic related forbearance provisions later this year should put some additional homes on the market, but not dramatically. Of the roughly 45 million mortgages in the US, 4.5% are currently in forbearance, but the majority of those aren’t likely to enter foreclosure, Goldman said, “because the substantial improvement in the labor market we expect in coming months should increase households’ ability to resume mortgage payments.”

What Are the Future Trends Looking Like?

Unfortunately there is no crystal real estate ball, but there seems to be some general consensus among economists and other experts. 1) Interest rates may rise slightly, but are expected to remain historically low. 2) Home inventory will increase, but will stay a seller’s market due to the slow rate in comparison to need. 3) Home prices are still growing at the fastest rate on record.

All that being said, it is a GREAT time to sell your home! Buying can be more of a challenge than in the past due to tight inventory, but NOT impossible with the right strategies and negotiating tools in place which a good Realtor will provide you with. If you are interested in buying or selling your home or land, please call us, it will truly be our honor to serve you!

By Holly A. Morris, Realtor

The Meridian Real Estate Group

For Additional Blog Content, Click Here!