Multiple ongoing trends in the housing market have pushed away home affordability for the foreseeable future.
- A new report from the U.S. Census Bureau shows that housing construction has increased 6% year-over-year, but high mortgage rates, labor costs, and land prices have inflated the cost of homes.
- A March 2022 YouGov survey found that two-thirds of millennial and zoomer respondents say they cannot afford home ownership due to having lower incomes in a highly priced market and lacking the savings for a down payment.
- Home prices have soared in recent years during the COVID-19 pandemic, with average prices increasing from $391,900 in 2020 to $543,600 in 2022, and have been driven higher in the early months of 2023 by high-interest rates, Statista reports.
- Multiple ongoing problems are keeping home prices high—including financially struggling young customers, heavy demand, high-interest rates, high mortgage rates, high land prices, and poor construction incentives.
Why It’s Important
Supply and demand is the basic rules of economics. After the 2008 financial crisis, prices bottomed because thousands of homes were foreclosed. Low demand and high supply decreased housing prices to historic lows. But this is no longer the situation facing homebuyers.
The market lacks the volume necessary to keep prices moderated. Demand is outstripping supply, and millions of customers are being priced out of the market or forced to avoid selling while interest rates are high. This has created an inventory crisis.
Cliff Freeman Jr. is a broker associate at the Cliff Freeman Group in Dallas, Texas. He tells Leaders Media that his market is one of the hottest in the country. Since September 2019, housing inventory has decreased to nearly a third of its prior volume, from 3,188 available homes to 1,328 homes this month. Other popular cities have seen similarly volatile fluctuations. Orlando, Florida, has decreased from 2,300 homes in December 2018 to 773 this month. In the same time period, Nashville, Tennessee, decreased from 1,616 to 1,066. Tampa, Florida, has decreased from 2,029 homes to 825.
“If we had a normal resale market, we’d have more homes for sale than we do now. Supply is so small, and it is driving up the prices. Sellers are not selling. We have more demand than supply, and sellers are not putting homes on the market, affecting volume. And it will stay that way until people are comfortable with high mortgage rates,” he says.
Even if high-interest rates decrease and construction catches up, there will still be an issue with demand. Freeman argues that the moment the market improves will be the moment that demand quadruples. Sellers will feel empowered to sell, and prices will remain high. He predicts that the market will take years before prices begin returning to normal until either the supply increases or the demand decreases dramatically.
Backing Up A Bit
The lack of new housing construction has also played a major role. As Freeman notes, his city of Dallas was already experiencing a shortage of 85,000 homes prior to the COVID-19 pandemic, and the mass interstate migration that has occurred since has only intensified the problem. Construction is not meeting the demands of housing shortages due to high inflation and supply chain shortages.
Additionally, houses that are under construction are largely not starter homes but luxury homes. Land prices are very high at the moment, but construction companies do not benefit from that increase, which has incentivized companies to build large numbers of larger luxury homes on small plots of land. Construction companies have an active incentive to avoid building affordable starter homes for the sake of profitability.
“When I was growing up, ranch-style starter homes were roughly 1,200 square feet to 1,700 square feet. We’re still seeing those built, but there is no question that market segment has been neglected. People are still demanding size. Americans have fallen in love with large buildings that can raise families and serve as multi-generational homes. The bulk of buyers want big closets, big bedrooms, and open spaces. Right now, the average is roughly 3,400 square feet,” says Freeman.
The average size of the American home has changed over time. Home sizes have nearly tripled in the past 73 years since 1950, with different studies showing that average square footage has increased from below 1,000 feet to above 2,500, depending on the market. Much of the increase has been driven by customers desiring more bedrooms, bathrooms, and larger space for families.
In the 2010s, luxury homes shrunk slightly due in part to the financial crisis. Home Innovation’s 2019 Builder Practices Survey found a 164-foot decrease in luxury home sizes between 2013 and 2018, as young buyers preferred single-story homes with fewer bathrooms. The U.S. Census Bureau reports that single-family home size decreased by 18% from 1992 to 2019.
In theory, shrinking home sizes would decrease real-estate prices, but high demand and land prices have mitigated any market benefit. “Some people hypothesize that home sizes have gotten too big and need to be smaller, but I am not seeing that reflected in the market unless you’re looking at ‘empty nester’ homes, which are catering to a specific market. But looking at the suburbs, they’re building large buildings on smaller lots in high-density areas,” says Freeman.