The Critical Role of Supply and Demand
Currently, in the US housing market, things feel very much like they are at a standstill. Buyers are waiting for lower rates, and sellers are watching as their homes sit for longer on the market than in the past four years. This is a stark difference from 2020 when lower rates created a home-buying frenzy and pushed home values up nearly double what they were in 2019.
The market slowdown started in 2022. This was because as the Fed started to increase interest rates, these new monthly mortgage payments were too expensive for many families to afford. In most cycles, this is when you start to see prices decline. However, after this slowdown, home prices started to increase again. This was confusing to people observing the market. Why would prices start to go up again once buying had started to slow down even though the Fed continued to raise rates?
Supply and Demand
The main driver of these housing prices is simple economics. A lack of a housing supply paired with a large demand. As long as there are more buyers than sellers, then a large correction cannot happen. Dips may show up in certain markets, but they will be minimal and not anything close to what we saw in 2008.
Let’s start by discussing demand. On our YouTube channel, we point out that we have two sources of demand right now and that is making our housing shortage worse. The first part of the demand we have always had, which is the natural progression of renters wanting to buy homes. However, we have also seen immigration increase a lot since 2020 and this creates a second form of demand. As these immigrants also need housing, whether it is in the form of renting or owning, it still takes up the housing supply. The Census Bureau data shows that since January of 2021, the number of immigrant-headed households is up 2.4 million. Since 2020, only five million homes have been added to the housing supply, so the immigrant-held households are taking up fifty percent of that supply.
Now that we have covered the demand, let’s jump over to supply. The best way to fix the housing problems is by adding more supply. We never had a supply issue until 2008. Construction loans are personally guaranteed, meaning builders have exposure if they want to build homes. In 2008, a lot of builders lost everything if they happened to be in the middle of a construction project as home values plummeted.
Something similar happened again in 2020. Construction loans are variable and between the Fed increasing rates, supply chain issues and inflation pummeling construction budgets, many builders once again felt the strain of not being able to turn a profit and some even found themselves underwater.
Because of what happened in 2020, many builders are either too cautious to start building again or they are ineligible to get the lending to start building again. This lack of building is going to hit the supply of homes hard starting in 2027 as that is when projects that should be starting now would be delivered to market.
Is a Housing Crash on the Horizon?
The straightforward answer is no. A balanced market typically has a six-month supply of housing inventory. The National Association of Realtors (NAR) says there was a 4.3-month supply of homes for sale in September. This ongoing lack of inventory explains why the supply-and-demand equation simply won’t allow a price crash in the near future.
There are just too many people who want to buy homes and too many sellers locked in a low interest rate that don’t want to sell their home. Increasing demand due to immigration and a decreased supply due to a lack of new construction will only make the shortage of housing worse, further increasing rents and home prices into 2027.