Depending on who you ask, the biggest obstacle for homebuyers is either mortgage rates, home prices or inventory. Or often all three.
I’ve been writing about how steep mortgage rates negatively impact affordability for the average borrower, but I was curious to explore the impact of today’s housing shortage.
In a balanced housing market, there are typically five to six months of supply. Today, most markets are averaging half that amount, meaning there’s far more buyer demand than there are homes for sale.
“It’s the urgent lack of new and resale inventory that’s the biggest drag on the housing market,” said John Hunt, chief analyst at MarketNSight, a housing market data analytics company. According to Hunt, elevated mortgage interest rates are stifling supply even more.
As the market slowly inches its way to recovery, inventory is expected to climb across the country, having already improved since 2022.
“There are 100% more homes on the market now than two years ago,” said Mike Simonsen, founder and president at Altos Research. Still, home prices will remain high until supply catches up with demand.
I spoke with experts to uncover what led to the shortage of houses, which markets are recovering faster and how buyers can find relief from the high cost of housing.
Low housing inventory isn’t a new problem
Housing inventory typically falls into two categories: existing homes and new construction. On both sides, real estate watchers say low housing supply has been a problem for a while.
Few existing homes for sale
When it comes to the lack of existing homes on the market, the biggest culprit is high mortgage rates. That’s because it’s cheaper for current homeowners to hold onto their mortgages instead of selling and moving. It’s called the “rate lock-in effect.”
Let’s break that down. Between 2014 and 2021, average mortgage rates were below 5%, even dropping below 3% during the pandemic. Homeowners were able to snatch up home loans with relatively low interest rates and affordable monthly payments.
When inflation surged in 2022 and the Federal Reserve began hiking interest rates to slow price growth, mortgage rates roughly doubled within a year. Today, with average mortgage rates still high around 7%, the majority of homeowners have little incentive to take out a more expensive loan on a new property.
“People are reluctant to put their existing home on the market because it means giving up a lower mortgage rate (often less than 5%) and purchasing another home with a mortgage rate above 6%,” said Robert Dietz, chief economist at the National Association of Home Builders.
Limited new home construction
The lack of new home construction is also a major problem. Since the 2007 financial crisis, there has been a dramatic decline in homebuilding: Between 2010 and 2018, fewer new homes were built than in any decade since the 1960s.
During the pandemic, builders struggled with supply chain issues and a lack of skilled tradespeople to construct houses. While supply chain issues have since eased recently, builders are facing higher interest rates on construction and development loans, which make it more expensive to finance new projects.
“We have underbuilt housing for the last decade, leading to a housing deficit of at least 1.5 million homes,” Dietz said.
In particular, there’s been a significant drop in the number of affordable new homes coming to the market. In many areas of the country, exclusionary zoning and bureaucratic red tape bar homebuilders from constructing affordable housing units, according to Hunt.
Prior to 2007, it was much easier for homebuyers, especially first-time buyers, to find cheap starter homes. Over the past two decades, new construction has been geared toward larger, more expensive single-family homes and multifamily housing.
Starter homes are smaller (typically 1,500 square feet or less) low-cost properties that help first-time homebuyers and lower-income families access homeownership. Starter homes have gotten more expensive in recent years, but typically range between $200,000 and $350,000.
Low inventory drives up home prices
A shortage of available housing leads to rising costs. “Where there is little supply and high demand, prices will rise,” Hunt said.
During the pandemic, when mortgage rates were at record lows, competition surged in the housing market. Between 2020 and 2022, the median home price in the US increased by more than 40%, far outpacing wage growth.
Since then, rising mortgage rates have put somewhat of a lid on demand for homes. Home price growth has slowed a bit, but tight inventory conditions are allowing sellers to keep listing prices competitive.
Housing supply should improve in many markets
Housing inventory has improved year over year, with new construction helping to fill the void. According to Dietz, newly built homes now account for one-third of all active listings -- in a typical market, newly built homes generally make up only 12% to 15% of total inventory.
Inventory levels also vary significantly by local markets. For example, Southern and Gulf states, like Florida and Texas, have seen inventory levels recover nearly to pre-pandemic levels. New construction has been most prevalent in the South and Western regions, where there’s more available land to build on. In comparison, the number of active listings in the Northeast remains 61.9% below pre-pandemic levels.
“The only solution to the long-term challenges of cost and availability of housing is to build more attainable, affordable housing,” Dietz said.
Lower mortgage rates could make things … harder
Experts are keeping a close eye on mortgage rates to gauge where inventory will go. At the start of 2024, experts predicted mortgage rates would decline gradually as inflation eased and the Federal Reserve began lowering interest rates. However, inflation has remained high and the outlook for Fed rate cuts keeps getting pushed back.
Assuming mortgage rates stay relatively stable, Simonsen expects this year will have 25% more single-family homes than the previous year. However, if mortgage rates fall, demand for homes will likely accelerate, inventory will be snapped up and prices will push higher, Simonsen said.
Though there should be a moderate increase in total inventory by the end of 2024, it will be far below pre-pandemic levels. “We will still be feeling the effects of the lock-in-effect for the rest of the year as rates remain elevated,” said Hunt.
How homebuyers can cope with today’s housing shortage
Neither the pace of homebuilding nor the direction of home prices and mortgage rates are within your control. Even so, experts say there are ways you can find a better deal on a home (or even find one at all).
Expand your home search criteria: When home shopping, don’t limit yourself to one specific area. Keep an open mind to include lesser-known areas and submarkets. Sometimes you can find a great house for a cheaper price outside of urban areas.
Consider a fixer-upper: Fixer-uppers and cheap old houses will take a lot more work and additional renovation loans, but they usually come without the competition and bidding wars we see with turn-key ready homes.
Look into first-time homebuyer programs: First-time homebuyer programs can help make homebuying more affordable by offering down payment and/or closing cost assistance.
Explore new construction: Many homebuilders are offering incentives to buyers, such as buying down their interest rate with mortgage points, discounting prices or assisting with closing costs. You might be able to find a new home for the same price (or even less) than an existing one.
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