The Nation’s Housing Crisis is Easing But Not Over
The Federal Reserve’s halving of the prime rate in this month, and the possibility of further rate reductions this year have likely boosted the hopes of potential homebuyers. It will take more to resolve the housing crisis in America than just lower rates. It could take legal action.
The laws of supply and demand govern almost all prices, and the housing market does not differ. According to the economic maxim, prices are affected by consumer demand and supply. The high demand and low supply of housing have led to higher prices in today’s market. We did not fall into this mess overnight, and it will be a long time before we can get out. Origins of the Housing Crisis
The home building and housing markets have never recovered from The Great Recession. The Great Recession, which is the longest economic slump since World War II, began in December 2007, and continued until June 2009. Lehman Brothers’ failure, which was the fourth largest investment bank in the world at the time, as well as the burst of the housing boom were two of its most significant events. Before the recession, about 2 million homes were built each year. It is an understatement to say that this number fell when the housing bubble burst. The number of new home starts has 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. The report found that housing shortages had increased from 4.3 millions the previous year to 4.5 by the end 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. At the same time, however, 1.8 families were formed. “The affordability crisis extends to renters as well, with
nearly half of renter households being cost-burdened
. The long-term solution to affordable housing is to fill the housing shortage. 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 ProblemAn 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 apartment management model aims to achieve 100 percent occupancy by charging the highest rent possible. The lawsuits claim that RealPage persuaded landlords to increase rates and accept lower occupancy. RealPage’s pitch was that landlords would be able to make more money by accepting lower occupancy rates. This collusion might have increased landlords’ 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. A typical mortgage costs $1,827, which is $236 less per month. 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. Renters are still faced with a major obstacle: the down payment. But for those who manage to make it happen, homeownership can offer lower monthly costs as well as the opportunity to build equity over time. 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
. This rate has been under 7 percent since last June. This will allow more families to purchase a home. The good news is the Federal Reserve Bank announced it would further reduce rates in the near future. 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. According to Zillow, the number of
homes on the market is up 22 per year over last year
. Zillow predicts that 4.1 million houses will be sold by the end this year. Further, it expects 2025 to see 4.3 million home sales.
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