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Question:  

Housing costs are outrageous, especially for those looking to purchase. What will it take for prices to shift to more reasonable levels?

Answer: 

The percentage of wages and/or income spent on housing has risen to 33% according to the 2023 Home Affordability Report. House hunters feel the squeeze from higher prices, higher mortgage interest rates, and reduced supply all contributing to reduced affordability. With interest rates at 30-year highs in the 7% range, and the low supply of homes, it’s no wonder prices remain high, frustrating potential home buyers and renters. 

According to Zillow, 61% of outstanding mortgages have a rate of less than 4%, and 9-% of mortgages are lower than 6%. Homeowners who’ve locked in rates lower than current market rates are unlikely to sell their homes, adding to stalemate in supply/demand obstacles. 

The supply of existing homes is at historically low levels and is unlikely to increase. It’s no surprise that owners will hold onto their comparatively low mortgages, forcing potential homebuyers to consider new constructions. 

The solution seems obvious, just build more homes. It’s estimated that the U.S. needs an additional 3.5 million homes to address the current housing shortage. Yet, building permits and housing starts don’t indicate that this gap will close anytime soon. June building permits were 15.3% lower than a year ago, although much of the decline, lately, has been in multifamily starts. Housing starts in June were lower than expectations, declining 8.0% year-over-year. Despite significant differences among regions, the bottom line is that at current rates, the housing shortage is unlikely to be filled. Additionally, despite the National Association of Home Builders (NAHB) Housing Market Index’s further improvement in July, homebuilder sentiment is still being negatively impacted by high mortgage rates, increased construction costs and supply-side challenges.

If, or when mortgage rates decline, lower rates will be met with a rush of consumers wanting to buy homes, which could put more upward pressure on the price of homes. We had a taste of this during the first quarter of the year as mortgage rates came down and the housing market started to stabilize after several years, but that didn’t last for long. 

At the moment, there’s not much that could bring the housing market into equilibrium in the short term. It takes a long time for investments in the housing market to shift consumer behavior meaning that the lag factor of an increasing supply of new homes takes time to materialize into actual home purchases. Unless rates drop, the only reasonable resolution is for home prices to go up enough to incent builders to increase new home construction. But will that really solve any problems? Just like the famous whisper quote spoken to Ray Kinsella (Kevin Costner), in Field of Dreams, “if you build it, he will come.” If the price is right! 

It's often suggested that you should spend 30% of gross monthly income for housing costs. It follows that higher housing costs tend to hold back overall economic growth. Total housing expenses tend to account for one-third of consumers expenses and as of March 2023, made up one-half of consumer price inflation due to higher costs. When income sources are used for housing costs, other essential living expenses such as food, transportation, health care, and discretionary expenditures may be diminished. We’re certainly experiencing the effects of lack of affordable housing here in Southwest Florida for many of our workers. The solutions won’t be simple and will take time. Stay focused and plan accordingly. 

Source: FactSet, data as of 7/7/2023