Vol 21 (2024) - Issue 6

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The US Housing Market is a Mess – Super Cheap Mortgages of the COVID Era Are Mostly to Blame This Time

Synopsis
Home ownership has always been the cornerstone of the proverbial American Dream and the means by which most middle-class Americans have built personal wealth for decades. The formula has been straight forward: Save up for a downpayment, buy a house, make your mortgage payments on time, build up equity as home prices gradually appreciate, and finally, sell your home years or decades later for a tidy profit. It was a nearly foolproof way to accumulate some wealth over time, accessible to most working families for several generations and often constituted the bulk of their retirement wealth. But for nearly two decades homeownership has become a growing source of financial stress for many US households and increasingly a dream deferred for first-time home buyers. Yet for longtime homeowners in attractive markets, it is proving to be a veritable goldmine as never before when it comes time to cash out. It is a complicated story of a once predictably stable housing market upended by years of underinvestment in new housing, age-related demographic shifts, and well-intentioned policy actions with distorting effects, resulting in unanticipated demand booms and recent supply shortages. Consequently, average Americans are paying more than ever for a home relative to their income, a trend that has steadily worsened for several decades. Moreover, the number of home sale transactions has plummeted since mid-2022 to levels not seen since the Great Recession and its aftermath, as more homeowners with cheap mortgages choose to stay in place. Aspiring homeowners are forced to choose between paying top dollar for a piece of the Dream or staying in a rental market that is increasingly expensive as well. It is hardly a dreamlike state. High shelter costs, either as an owner or tenant, are a big cause of financial anxiety for a majority of Americans who continue to express dissatisfaction with the state of the economy to pollsters.
The housing sector is not an industry per se. Overwhelmingly it consists of Americans selling homes to each other. (New homes consistently account for less than 15% of total single-family home sales in any year.)
However, its wider economic impact is huge, ranging from homebuilders and subcontractors, realtors, mortgage providers, and home furnishing and improvement retailers. Consequently, the health of the housing market often reflects the condition of the broader consumer economy. That seems especially apt these days, with the high end of the housing market operating in a rarefied realm of its own while the rest of the market struggles to find a healthy balance.