In the post-pandemic economic recovery, having a roof over your head might be a luxury in President Joe Biden’s America. It is becoming more challenging for millions of Americans to cover the cost of their mortgage or even to pay the rent at the beginning of every month. With inventory levels failing to keep up with strengthening demand and interest rates about to rise again in the coming months, shelter inflation is going through the roof.
Renting the American Dream
In October, the cost for single-family rental homes surged 10.9% year-over-year to a sixth consecutive record high, a new report from analytics firm CoreLogic found. The double-digit increase is being attributed to vacancy rates hovering at a 25-year low and escalating demand as more prospective homeowners transition to rentals.
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According to the data, rent growth increased for all four price tiers (lower, lower-middle, higher-middle, higher), with a substantial percentage of the gains being concentrated for the most expensive rentals. Moreover, Miami, FL, had the highest rent growth among major urban centers as shelter costs ballooned at an annualized rate of 29.7%. Phoenix, AZ, and Las Vegas, NV, were next on the list, with gains of 19.3% and 16.5%, respectively. Chicago, IL, ranked last as the city recorded 4.2% annual rent growth.
While more builders and investors are constructing build-for-rent properties, many investors are scooping up lower-priced homes right now and turning them into rentals, which is imbibing shrinking stockpiles and affecting first-time entry-level buyers. That said, more rental supply is forecast to come online within the next three years as housing starts touched an eight-month high in November. But whether it will be able to satisfy demand or not, especially if more households flee the big cities for small-town living, remains to be seen
House Rich, Cash Poor
The U.S. real estate market has been supercharged throughout the coronavirus pandemic. Average home prices have skyrocketed nearly 20%, fueled by low mortgage rates and changing consumer patterns. Since the third quarter of 2020, total mortgage debt has risen by more than $1 trillion to $17.6 trillion. But housing is a critical component of the U.S. economy, representing about 170% of the country’s gross domestic product (GDP), which is still tame compared to a place like Canada, where the real estate market accounts for 300% of GDP.
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While many homebuyers may have gotten a COVID discount at the start of the pandemic, if young families got in on the market in the last couple of months, they may possess negative equity or could be underwater on their mortgage. This is leading to frustration and exhaustion for many people navigating an overpriced and undersupplied housing sector.
A recent ConsumerAffairs survey found that 40% of homeowners with mortgages reported working a second full-time job to cover housing expenses and mortgage payments. Described as “house poor,” these folks have little savings left after covering their note and monthly costs associated with their humble abodes. Still, despite the headaches many homeowners face, the survey found that most agree that it is better than renting, although fewer than one-fifth consider owning a home to be “one of the best long-term investments.”
Will Mortgage Rates Determine the Housing Market in 2022?
Today, the 30-year mortgage rate is around 3%, while 15-year rates are close to 2%. This low-rate environment offered consumers more buying power, allowing them to acquire larger residential properties with a bigger mortgage but at a lower rate. The consensus among many economists, including Dr. Lawrence Yun, the National Association of Realtors (NAR) chief economist, is that mortgage rates will jump as the Federal Reserve pulls the trigger on rate hikes to curb inflation.
“Interest rate hikes, soaring inflation and a smaller bond-buying program are a recipe for higher mortgage rates in 2022,” Bankrate wrote following the U.S. central bank’s December Federal Open Market Committee (FOMC) policy meeting.
NAR anticipates the 30-year fixed mortgage rate will be 3.5% by the end of 2022, and Realtor.com predicts 3.3% throughout next year. This, they note, could price more first-time homebuyers out of the market as the cost to service a mortgage would likely be greater than median incomes.
However, many believe that the fundamentals will play a more significant role in the state of the housing industry next year. It is estimated that the United States is approximately five million units short, and stocks are projected to grow only 0.3% in 2022. Plus, months of inventory, which measures the months it would take to exhaust current supply at the present level of sales activity, clocked in at 6.3 in October. This is far below the record high of 12.2 months in January 2009.
“If the market is cooling down, it’s only by a few degrees. There are still many more buyers than there are homes for sale, particularly in the starter home price tiers,” Kate Wood, home and mortgage expert at NerdWallet, noted.
Blame the Government
Despite enormous price growth in the U.S. housing industry, the country is quite tame compared to other real estate markets, such as Canada, Australia, or Germany. But why does the idea of homeownership appear out of reach for so many people these days? Be it outdated zoning laws at the municipal level or the laundry list of taxes, there are many barriers to entry. Although it has been most pronounced during the public health crisis, millennials giving up on homeownership was ubiquitous before COVID-19 dominated headlines everywhere. Like most things in life, it is the government’s fault why more people are turning to renting a shoebox in the city instead of a comfortable three-bedroom detached house or townhome.
~ Read more from Andrew Moran.
