The American Dream always included a home of one’s own, and yet, that basic aspiration may be well beyond the reach of the coming generation. Since peaking at 7.79% at the end of October, US mortgage rates have fallen to their lowest percentages since the May 2023 number of about 6.6%. But while shrinking borrowing costs have yet to translate into higher existing residential property transactions, they have resulted in, at least temporarily, greater new home sales. But renewed demand might not resolve an enormous issue for the latest generation of buyers: a lack of housing affordability.
According to the US Census Bureau, new home sales surged 8% month-over-month in December to a seasonally adjusted annualized rate of 664,000. The metric represented the largest increase in a year and a reversal from two consecutive monthly declines. Additionally, the median sales price was a little more than $431,000, a 34% increase from before the coronavirus pandemic. The average selling price was $487,300, up 27% from prior to the public health crisis.
Housing Affordability Matters
There is no inflation if the American people do not eat, drive a car, seek medical care, or live under a roof. This is the logic of Keynesian economists. Of course, the reality is much different, as housing affordability has become a generational crisis for millions of people. For instance, the median mortgage payment is about $2,200, double what it was in just 2021.
Industry experts aver the situation will not improve unless two things happen over the next year: more supply and lower interest rates.
National Association of Realtors (NAR) data show that total housing inventory is near all-time lows. “In the last decade, middle-income homeowners have accumulated $122,000 in wealth due to price appreciation alone,” the group said in a report. “However, a historic 50-year record shortage of affordable homes available for purchase has severely limited access to the residential real estate market.” It also found that the US is facing an “underbuilding gap” of approximately 5.5 million housing units.
Freddie Mac’s Primary Mortgage Market Survey illustrates that the 30-year mortgage rate is hovering around its highest level since the Great Recession. Moreover, Redfin, a real estate group, recently reported that fewer than 16% of homes for sale were affordable for a typical household in 2023, down from 21% in 2022. Affordability has collapsed 40% from before COVID, Redfin noted.
Although most of the population doesn’t pay much attention to the Federal Reserve, what the monetary authorities do matters greatly to the broader economy, including in the US real estate market. The central bank’s management of the Fed funds rate impacts Treasury yields, credit card interest costs, and mortgage rates. When easy money was flowing throughout the national economy during the pandemic, households were scooping up residential properties because they garnered exorbitant purchasing power in the form of bigger and cheaper home loans.
Now that millions of Americans have secured 30-year mortgages at meager rates and affordable prices, many are not listing their humble abodes in the open market. The trend explains the divergence between new home sales and existing home sales. This is good for them but not necessarily terrific news for those on the outside looking in due to a paucity of supply. Meanwhile, these same individuals are forced to rent, which has metastasized into an enormous challenge.
A new Harvard Joint Center for Housing Studies report discovered that rent is unaffordable for half of US renters. The study, titled “America’s Rental Housing 2024,” revealed that the number of tenants spending more than 30% of their income on rent and utilities has surged by two million in three years to a record high of 22.4 million. Plus, more than half of these folks are “severely burdened” as they allocate more than half of their income to the luxury of enjoying a roof over their heads. In addition to high rents, electricity costs have ballooned roughly 20% since 2021.
The silver lining? Housing economists say that rent prices have been on a downward trajectory since the end of last summer, tumbling 3.2%. However, this is not showing up in the inflation data, as the shelter index in the consumer price index (CPI) is above 6% on an annualized basis. Economists have been saying for more than a year that this component of the CPI would come down, but these prognostications have yet to materialize.
New Home Sales ‘Renaissance’
Supply trends have been mixed over the past year. Building permits and housing starts seesawed throughout 2023. Months of supply of new houses, a gauge of how long it would take to exhaust current inventories at the present rate of sales activity, has ebbed and flowed and remains below the record high observed during the global financial crisis. However, industry experts believe 2024 could be a “renaissance” for the housing market as construction activity is poised to be robust, demand remains strong, and interest rates ease. National Association of Home Builders CEO Jim Tobin told Yahoo! Finance: “I’m very optimistic.” Will the rest of the country share this optimism?