If more housing existed, home sales would increase, even with higher rates —but efforts to bolster affordable housing matter, housing experts say
The nation’s housing industry has entered a new normal in which the dynamics of the market appear perplexing — marked by high mortgage rates and high home prices, along with shrinking mortgage originations.
The perplexing part: Why are home prices not declining in this environment? It boils down to two factors, according to housing-industry experts: a lack of housing inventory, or supply; and high demand for that limited housing stock — which also is fueling a jump in new-home sales.
Fannie Mae recently projected originations for 2023 at $1.59 trillion, a revision downward from its January estimate of $1.65 trillion — with sales of new homes rising in dominance. That compares to a record $4.4 trillion in mortgage originations in 2021.
New-home sales are up 20% year over year as of May 2023 while sales of existing homes are down by the same level, resulting in new-home sales accounting for some 30% of total housing inventory. That’s more than double the typical range of 10% to 15%, according to the National Association of Home Builders.
Meanwhile, mortgage interest rates have hovered in the 6% to 7% range over the past six months, up more than 3 percentage points since early 2022, yet home prices have increased for several months in a row, Freddie Mac’s chief economist, Sam Khater, points out in a recent commentary.
Doug Duncan, chief economist at Fannie Mae, attributes the dearth of existing-home sales to the so-called “lock-in effect,” in which homeowners with low legacy rates in the 3% range “are disincentivized to list their home due to not wanting to give up a mortgage rate much lower than current market rates.”
“I don’t see homebuying costs decreasing significantly in the next few quarters,” said Arvind Mohan, CEO of Kiavi, a fix and flip lender. “As interest rates stabilize near their current levels, they will normalize from the record-low rates we saw during the pandemic.
“This, in part, is causing the tight inventory we’re seeing in the housing market today, as two out of every three houses have mortgages with interest rates below 4% and aren’t motivated to sell their house unless a significant circumstance warrants it.”
Very little inventory
Mike Simonsen, founder and president of real estate data firm Altos Research, said many homebuyers are adjusting to higher rates, however, and finding ways to pursue home-purchase transactions.
“And so, demand has been significantly more robust than we expected and, as a result, there’s very few homes for sale across the country,” Simonsen said. “…This is what I call a supply-constrained market.
“In other words, if there were more inventory, we would have more sales happening.”
Where might added inventory come from, if the bulk of existing homeowners continue to remain on the sidelines? One source of added inventory is the fix and flip industry, which is expected to acquire and renovate some 350,000 homes in 2023, according to Kurt Carlton, president of New Western, a private real estate investment marketplace.
“Not a lot of people are aware of this, but we have more than 15 million vacant homes in the United States,” Carlton said. “Now some of them are vacant because they’re second homes and things like that, but many of them are vacant because they’re dilapidated and uninhabitable.”
Clearly, not all these homes can be returned to the market in a cost-effective way, or face other obstacles, such as their location in higher-crime or deteriorating neighborhoods, according to Keith Lind, CEO of Acra Lending.
“Just because there’s vacant homes in the U.S. that doesn’t mean if you make them nice that people are going to automatically want to live there,” Lind said.
Carlton adds, however, that for fix and flip investors who understand their local markets, that vacant housing stock, in the right locations, still represents an opportunity.
“So, finding those opportunities, rehabbing and returning them to the market solves part of the [inventory] problem,” Carlton said.
Kiavi’s Mohan said that in the current environment, there is less homebuyer demand for purchasing homes that need renovation work than there is for acquiring a property that has already been “renovated/flipped.”
“[Real estate agents] believe this is due to the housing-affordability crisis paired with higher interest rates, so there’s no extra room in [homebuyers’] budgets to fix up a house after it’s purchased,” Mohan said. “This is yet another illustration of the important role real estate investors have in helping to combat the housing-affordability crisis.”
The Leading Indicator of Remodeling Activity, or LIRA, a measure developed by Joint Center for Housing Studies at Harvard University, seems to support Mohan’s assessment, showing that year over year “expenditures for home improvements and maintenance will post a modest decline of 2.8% through the first quarter of 2024.”
Another source of potential housing inventory is foreclosed properties — although absent a full-on recession, it’s still likely to remain a muted source of potential housing stock. As of the second quarter of this year, real estate data firm ATTOM reports that 311,500 residential properties nationwide were somewhere in the foreclosure process.
That’s up 20% year over year and up 45% from the third quarter of 2021, “when the foreclosure moratorium imposed during the coronavirus pandemic was lifted,” according to ATTOM CEO Rob Barber.
“The number of empty, abandoned properties in foreclosure — so-called zombie properties — was also up, 16% annually, to about 8,800,” he added. “Those numbers remain way below where they were when the housing market crashed after the Great Recession of the late-2000s, but still up.
“… The recent increase in foreclosures should help boost the supply of homes for sale. “
The other variable that could help to put more homes on the market is a bit counter-intuitive — and longer-term. Altos Research’s Simonsen said if we have multiple years of higher rates, that could spark many more homeowners to seek to sell their homes.
“Lower rates goose demand but not necessarily supply,” he explained. “If we have multiple years of higher rates, what we’re doing is resetting the cost basis for homebuyers.
“So, maybe you get to 12 million to 15 million homeowners that have 5%, 6%, 7% mortgages, then it’s more expensive for those folks to hold.”
Still, given the housing inventory shortage, relying on new-home construction, fix-and-flippers, foreclosures or longer-term high rates alone is not likely to address the problem in full. A recent report by online home marketplace Zillow estimates that the nation needs 4.3 million more housing units to meet existing demand.
“Not only does the number of ‘missing households’ without a place of their own to live [some 8 million families] exceed the number of available housing units, this gap has increased over time,” Zillow reports. “The magnitude of the housing deficit and how quickly builders can fill this gap will go a long way toward determining the path for U.S. housing affordability.”
Given the huge chasm, Lawrence Yun, chief economist at the National Association of Realtors (NAR), said some government intervention may be required to help address the existing supply/demand imbalance in the housing market.
“NAR is advocating for temporarily lower capital gains taxes for mom-and-pop real estate investors [i.e., fix-and-flippers] who are willing to sell to a first-time buyer,” he said. “This incentive can boost inventory and help meet housing demand while keeping home prices manageable and stable from the increased supply.”
ATTOM’s Barber adds that state and local governments also have financial-incentive programs designed to bolster more housing production, such as tax breaks, other subsidies for builders and local zoning-law waivers.
“At the same time, some of the key headwinds contributing to the [housing] shortage include local zoning laws that restrict how much housing can be built in any given community, stemming heavily from local neighborhood resistance to more development,” Barber said. “That gets into some very dicey issues connected to perceptions of crime, traffic, effects on existing property values and the even-thornier issues of race and class.
“Those are among the most intractable questions connected to the housing supply and will not be resolved quickly.”
A pair of academic researchers, Alex Schwartz, professor of urban policy at The New School; and Kirk McClure, professor of urban planning at the University of Kansas, point out, however, that the housing supply and demand dynamics still vary greatly market to market. In a recent research-study abstract, the researchers state that “because markets differ so much from each other in terms of their housing supply and demand conditions, we expect to find a broad range of shortages, surpluses and balanced supplies of housing.”
The researchers suggest that reforming zoning or land-use regulations to boost housing supply may be necessary in local markets that are truly supply-constrained, but alone that approach won’t address the larger national reality that “millions of people lack the income to afford what’s on the market.” In other words, boosting housing inventory alone is of limited value if the homes coming to market — because of rising labor, material and regulatory costs — remain unaffordable for a wide swath of interested buyers.
Yun stressed that there is growing demand for more affordable housing for people currently priced out of the market. He said just as bridges and roads are vital for the nation, “so is affordable housing.”
“We should view affordable home production like infrastructure,” Yun added. “Therefore, use tax incentives and government funding to boost affordable-housing production, since the private market by itself cannot absorb the rising cost of materials and regulations to produce affordable housing.”