What is happening with the housing market?

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What is happening with the housing market? Why big interest rate hikes are scrambling an already strange real estate landscape.

The story of the housing market for much of 2020 and 2021 was one of shortage — at least compared with what people wanted and were able to buy.

High prices and low inventory spread out to places that hadn’t normally experienced them. As urban dwellers didn’t need to go the office anymore and maybe wanted more space and better weather, the shortages and high prices familiar to a few of the hottest housing markets found their way across the country. Underlying this surge of activity was the Federal Reserve slashing interest rates to near zero, bringing mortgage rates to near-historical lows. This amped up housing demand even further, as high sale prices did not necessarily translate into much higher monthly payments.

The median sale price of homes jumped from $333,000 in the second quarter of 2020 to $430,000 in the first three months of this year. But at the same time, thanks to interest rates falling to near zero, affordability did not change that much, according to data from the National Association of Realtors (NAR). The times were great for sellers, however, as the market got extremely tight. Before the onset of the pandemic, there were just over 1 million active home listings; that figure bottomed out at around 375,000 and is now just over 400,000.

But the Federal Reserve has been trying to seriously tamp down an inflation problem that doesn’t seem to be going away, and that has meant mortgage rates are on a rapid rise. The housing market is entering a new phase, where homes are more available and buyers may be more scarce — and some sellers may not want to put their houses on the market.

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In the past year, mortgage rates have jumped from just under 3 percent a year ago to 5.5 percent after peaking at 5.8 percent, the highest level they’ve reached since 2008. While this is by no means the highest rates have been, it is some of the fastest acceleration of rates in recent history. Doubling in a year is extreme; it most certainly will have an effect on the housing market.

Grid answers your biggest questions on what is causing the supply crisis in housing and what it means for those buying or selling a house right now.

Why has the housing market been so tight?

The story of the pandemic was that housing prices became red hot, not just in the usual coastal cities of New York, Washington and San Francisco, but also in sunny southern cities, like Tampa, Florida, and Knoxville, Tennessee. In fact, the housing supply crisis seems to be happening almost everywhere in America. All of this was largely driven by a huge demand for new housing — new household formation was on the rise — and record-low interest rates.

Big cities saw their population fall, while basically anywhere else saw increases, including smaller cities and rural areas.

But not all major metro areas — according to data from William Frey of the Brookings Institution, collectively, New York, Los Angeles, San Francisco and Chicago lost around 700,000 people, while Sunbelt cities like Phoenix, Houston, Austin and Dallas collectively gained population. Some of the most expensive areas of already-expensive cities, like downtown cores, lost population, and their outlying areas gained, relatively.

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Before the pandemic, the median home sale price in Austin, Texas, was $400,000, according to Redfin, it peaked at $675,000 in May, and has since come down all the way to … $630,000.

The housing market also experienced the same supply strains as the rest of the economy — homebuilders had trouble finding workers; they even had trouble finding garage doors. This lead to the gap between the number of housing permits issued rising between the depths of the pandemic and early this year, before it went into reverse. Easy financing, new demand, limited supply: Prices had no direction to go but up.

How big is the current jump in mortgage rates?

Historically, 30-year mortgage rates of around 5 percent are not particularly high (mortgage rates were typically well above this level in the 1990s and 2000s), but what is unprecedented is the rate at which they have accelerated. Nothing like this has been seen since the early 1980s when, not coincidentally, inflation was incredibly high and the Fed slammed on the brakes in order to slow it down.

What might the interest rate increases do to the housing market?

This has two effects on the housing market.

One is that interest payments as a portion of total payments are up. Even as home values rose dramatically in the past few years, housing affordability did not decline much because of the fall in mortgage rates.

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In May of 2021, according to the NAR data, the monthly mortgage payment on what was then the median home price, $361,300, with 20 percent down, was $1,220, 17 percent of the median family income. This past May, the median home price was $414,200, and the mortgage payment was $1,842, which takes up 24.4 percent of the median family income. In 2019, typical mortgage payments took up almost 16 percent of the NAR’s figure for median family income.

The second thing many observers are watching to see is if house prices may begin to drop. According to data from Realtor.com, listings are up a quarter from a year ago, and new listings are up 5 percent. While this hasn’t translated into falling home prices quite yet, it could soften the market, although this will largely translate to existing home sellers getting less than they might have expected for their homes while home buyers pay more.

In some of the hottest markets, we are seeing evidence of declines. According to Redfin, housing prices were up 11 percent over the past year in June, but in some of the hottest markets, like Austin or Nashville, Tennessee, prices were still up from a year ago but have started to fall.

Is it better buy a home right now or wait?

There’s some anecdotal evidence that while there have already been dramatic rate hikes, the expected future increases in the 30-year mortgage rate will lead to buyers accelerating purchases to get ahead of further increases.

There’s also an even stranger possibility — that the combination of high rates and slowed or even reversed growth in home prices will lead to homeowners doing everything they can to keep their homes off the market for fear of not getting as much for their current home as they expected and having to go out and get an expensive mortgage. They could instead rent out their homes and then use the rental income to pay off a new mortgage.


What about renters?

Rental markets are strange. In Manhattan, the biggest rental market in America, the typical monthly rent is over $5,000 and, according to Apartment List, rents have shot up in New York City as a whole by 27 percent. But in some of the hotter markets of the pandemic era, things are starting to turn around. According to Apartment List’s national data, rents have grown “only” 5.5 percent this year, and vacancies have started to grow.

And things have started to calm down in some of the hottest markets from immediately following the arrival of covid-19 in the United States: “Three of the metros that have seen the slowest growth over the past six months — Phoenix, Las Vegas, and Jacksonville — are among the 10 fastest growing markets over the course of the pandemic as a whole. After booming consistently for two years, these markets are finally showing signs of plateauing,” according to Apartment List.

What if you need to sell your house?

Jay Parsons, the head of economics for RealPage, a real estate software company, suggested that with rates moving up — and with more rate hikes on the way — along with “fears around potential peak price” could cause a “freezing effect” on the market.

“I suppose for some small number of deep-pocketed homeowners needing to relocate, they could potentially hold onto their current home as a rental property if they’re not convinced they’ll get the pricing they want to sell. But I can’t imagine that happens at … scale to move the needle.”

What if there’s a recession? But of course interest rates don’t just move on their own, Parsons explained. An overall economic slowdown, or even a recession, can have its own independent effects on the housing market. Household formation could slow down as people move back in with their parents or children or decide to live with roommates. This could slow down home sales and drag down prices.

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After all, according to recent research from the Federal Reserve, “housing demand drives short-run fluctuations in home sales and prices, while variation in supply plays only a limited role.” What the Fed researchers found was that “reduction of supply was a minor factor relative to increased demand in the tightening of housing markets during COVID-19.” Instead, “housing demand is very sensitive to changes in mortgage rates, even more so than comparable estimates for home sales.” This implies that a mortgage rate hike and a possible economic slowdown could dramatically cool the housing market, bringing down prices and sales.

One increasingly popular explanation for the housing shortage is increasing investment of private equity in real estate. What do we know about private equity’s effect on the housing market?

One of the most commented upon and lamented trends in the housing market is the presence of large investors who purchase homes, especially single-family homes, and rent them out. While the presence of investors in multifamily housing is nothing new — after all, someone with enough money must own the whole building if it’s going to be rented out — since the financial crisis, the presence of investors in the single-family market has increased.

According to data collected by the advocacy group Americans for Financial Reform, about 240,000 single-family homes are owned by institutional investors as rentals. There are about 140 million residential homes in the country, according to the Urban Institute, about 123 million are occupied, and around 94 million are single family, making rentals owned by institutional investors less than 1 percent of the single-family home supply.

But institutional investors do appear to have made up a large portion of new sales in some areas, especially in the Sunbelt, according to the House Committee on Financial Services. Institutional investor home purchases have gotten as high as 43 percent of the market in the Atlanta area and 39 percent in the Phoenix area, the committee found. In the years following the 2008 financial crisis, maps of investor purchases of single-family homes largely mapped where foreclosures occurred en masse and tended to be concentrated in neighborhoods with larger Black and Hispanic populations. The committee also found, not surprisingly, that these investors tended to concentrate their purchases in communities with lower home prices compared with rents.

And in 2021, these purchases sped up in some of the hottest housing markets in the country, according to a Georgia Tech research group, which found that “large corporate investors operating in Miami, Tampa and Atlanta increased their purchases during the pandemic, and by summer of 2021, were purchasing homes nearly twice as quickly than in 2019.”

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But as far as the availability of homes to buy or rent goes, private equity and other large corporate investors in real estate are mostly taking advantage of a situation of housing scarcity, not creating it. According to estimates released by Up for Growth, a housing supply advocacy and research group, there’s a 3.8 million home gap in housing supply compared with housing demand, almost double the 1.65 million home shortage in 2012.

How do big investors buying up houses affect housing costs for everyone else?

While overall housing costs are far more likely to be affected by undersupply of new homes, shifts in where people are buying, movements in interest rates and zoning regulations that make it difficult to build in expensive areas, there is some research that institutional investor purchases of homes do make home purchases more expensive, especially for first-time buyers toward the bottom of the market.

However, for every buyer of a home, there is a seller. While the market for single-family rentals for large, institutional investors is largely a post-financial-crisis phenomenon, and foreclosures have been falling. This means that many Black and Hispanic homeowners are likely seeing some benefit from these investors’ willingness to buy in neighborhoods that wealthier and white homeowners may have ignored.

Thanks to Lillian Barkley for copy editing this article.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.