Housing Market Check-in: The Good, The Bad, The Hope, & The Hung Heads Among American Home Buyers

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Almost exactly forty years ago, in October of 1981, interest rates for 30-year fixed mortgages peaked at 18.45%. Housing affordability, measured by dividing house prices by gross annual earnings, hovered at a history-making low of 62—that means the average American family had roughly 62% of the income necessary to qualify for a home priced at the median in the market. No one thought it was a good time to buy a home.

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Rounding the corner into 2022, the two housing markets couldn’t look more dissimilar. Interest rates are now turning heads again, but this time they’re on the borrower’s team. In preparing for a pandemic-induced recession, the federal reserve kept rates near zero to incentivize activity and aid an accelerated recovery. The Fed has since kept rates low, and indicated a plan to stick to those rates through 2023.

So in terms of rates, the two market moments—1981 and 2021—couldn’t be more dissimilar. But today, 71% of Americans say it’s a bad time to buy a home; the last time home buying attitudes reached that level of despondence harkens back to 1981, when mortgage rates were turning home buyers away and the housing affordability index kept falling. And maybe most tangibly, the number has flipped in just a few months; it would have been a 35% minority holding back, with 65% of Americans showing excitement about home buying, back in March.

What’s Happening to Home Buying?

First, let’s look at the supply side. The work and travel restrictions brought on by COVID-19 choked the flow of crucial supply. Signs of the building pressure could be seen in key indicators like the rising cost of lumber futures, which reached its highest peak at USD 1,671/000bf. The effects of that alone added almost $36,000 to new home prices, according to an analysis by the National Association of Home Builders.

From scarcity of materials to moratoriums on new starts, the constraints on supply have been an inarguable force shaping the market reality. But it’s not supply constraints alone that’s brought the market to this point.

While construction teams and renovation professionals wrestled for the necessary materials, homeowners and prospective home buyers all took the twin cues of low rates and rising equity as a sign to plan their next move. The motivation is certainly understandable; research indicates that as a collective, homeowners added a total $1 trillion in additional home equity between September of 2019 and September of 2020.

Inordinately high demand arose—newly free from office and facing a potential long-term future of working from home, home equity and low rates were a green light to many families. At the same time, supply has been limited in a way that can’t be manipulated or alleviated for the flow of goods in the market; new construction outlooks remain low. While the unique conditions have created an incredibly competitive market throughout this strange economic moment, they might have delivered us to an impasse—economists have lowered their forecast for home sales in 2022, urging that the country needs many more homes for a corrected market to emerge.

The Need for More Homes

It’s hard to understand how a competitive housing market can surface a housing shortage. Easier to comprehend might be the disappointment on the part of home buyers who are being priced out of the market or beat to the punch at competitive home showings, but how does the number of homes available drop below the market need?

In understanding the shortage phenomenon, it’s important to track the post-pandemic trend of de-consolidation. Last May, the US had lost almost 2.5 million ‘household’ units, as families consolidated to save money and live under one roof. Now, with recovered employment, households are re-forming and surpassing the pre-pandemic peak—we’ve reached a new high of 131 million households.

And it’s all happening at a time in which millennials are at their most active point in the housing market. In 2020, millennial home buyers comprised 54% of all home-purchase applications, and 79% of first time home buyer applications. The largest share of millennials currently fall between the ages of 28-30, which is the most common age for first-time home buyer demand. The natural spike in millennial demand has been orchestrated with the most challenging market we’ve seen in 40 years—or so it feels to the aforementioned 71% of home buyers.

A Post-COVID Bloat?

An in-depth look at market forces shows it’s a hard time to have to buy a home. But is it a good time to have to buy anything? The recovery-era price hike is showing its head in other areas, most notably in the prices of cars. The cost of used cars has skyrocketed by 21% since April of 2020, and much of that demand represents buyers who were turned away from the new car market after major global shortages drove prices out of reach.

There’s a case to be made that we’re watching the downstream effects of a loss of confidence, an understandable market outlook that would have taken root back at the inception of the pandemic. When nearly every aspect of our lives fell into uncertainty, the incentive toward spending lowered astronomically. Signs of inflation outpacing wage growth are certainly there for anyone who’s looking. And the approach to a financially attainable lifestyle modeled by generations above is becoming seemingly harder to achieve at a similar age.

The hardship of many post-pandemic realities, including the economic outlook, isn’t to be diminished. But a tonic for the times might be a recognition of the opportunities that have come by way of compensation. Rising home equity can turn more Americans into established investors faster than ever before. Novel opportunities in market niches like short term rentals, or in-home hosting through an Airbnb model, are offering families secondary revenues that can positively change their five year plans. And as demand expands to secondary markets, the redistribution of capital is making way for more municipal developments.

It isn’t true that the new market normal is an easy one. But it might be the case that the 71% of Americans hanging their heads might find reprieve (and revenue) as the market makes way for some of those new opportunities. In any case, the best we can do is take care of each other and hope for a return to the kind of optimism that’s characterized the bulk of the last four decades.