In my regular engagement with experts in housing and economists in the field I am always intrigued and surprised by the variety of opinion about where the housing market is currently and where it is going. I shouldn’t be. On any given day, I will read or hear reports in the news that housing is either are expensive – rents or purchase price – or that housing prices are going down. The housing market is hard to figure out right now.
Kurt Carlton, is president and co-founder at New Western, a national service that helps match investors with available residential investment opportunities. Bottom line, literally here, is that policy makers should be encouraging more private investment in the housing market, not discouraging it. This is important especially for people who earn half of median income. Those households are always hit hardest when housing is scarce or not well maintained. As usual, my comments are in italics.
Last year, I guessed that we’d see a slowdown in housing construction in both the single-family and multifamily because of rising interest rates and overall uncertainty about the market. Has that happened? Or are we seeing continued building in spite of higher interest rates? Why or why not?
Indeed, your prediction has proven correct. Currently, there is a limited availability of 70,000 newly constructed homes for sale. The National Association of Home Builders has forecasted a modest figure of 830,000 new homes for this year. Builders exercised caution and scaled back their construction efforts, anticipating a significant decrease in demand resulting from the projected rise in interest rates. However, it is important to note that the dramatic rise in rates has also led to a reduction in the supply of existing homes listed on the market.
As a result, builders find themselves in a favorable position, as they are now an important source of available housing inventory. Many builders have revised their forecasts upwards, and their share prices have outperformed the overall market. This outcome highlights the fortunate circumstances in which builders find themselves, benefiting from the interplay of reduced supply and increased demand.
Carlton is saying I was right about the slowdown, but honestly, by now, I had expected a shut down. Now, because of inflation, people are still in the housing market on the production and buying side, something I noted in a recent post.
I spoke with an economist who suggested, correctly I think, that inflation is still running hot along with overall consumer confidence. Demand for housing seems unabated as well. I had guessed that we’d see the housing market grind almost to a halt with people hanging on to what they had, and others priced out by rates. Why hasn’t that happened?
The reason the housing market hasn’t come to a halt is because even before interest rates increased, the market was already experiencing a shortage of available homes. Most home purchases traditionally come from sellers listing their current homes. Currently, the majority of mortgages have rates below 5%, with many in the 3% range, so sellers are reluctant to pay double the interest rate for a change in neighborhood. As a result, fewer homes are being listed for sale. This reduction in supply has coincided with the existing demand, preventing a significant oversupply in the housing market that would drive down values.
While sales activity has seen a decline of around 20% compared to the previous year, the underlying factors such as affordability and supply and demand dynamics have not changed much. The shortage of affordable housing persists, and the previous market conditions continue to play a significant role.
Will we see a correction with a recession? When will that happen? I also guessed that we’d see supply drop with lack of construction when the economy recovers after that recession, and when demand returns prices would rise quickly. I suggested now is the time for local governments to incentivize more housing development to avoid that. Any thoughts there?
The crux of our current housing challenges can be attributed to one fundamental issue: a lack of housing supply. Currently, there is a significant shortage of approximately 5 million homes based on demand from new family formation. Further, estimates by the National Association of Realtors suggest a shortfall of at least 320,000 homes within the critically needed price range for middle-income buyers. Any measures taken to introduce more housing inventory into the market would contribute to addressing this issue. As long as the supply-demand imbalance persists, we can expect prices to remain relatively stable or even rise. It is unlikely that we will witness a correction in home prices. In the event of an economic downturn leading to increased job losses, there is a possibility that home prices could paradoxically increase due to corresponding rate cuts aimed at stimulating the economy.
In light of these circumstances, I agree with your suggestion that local governments should consider incentivizing more housing development at present. Taking proactive measures to encourage housing construction can help mitigate the potential future consequences of a supply drop when the economy recovers and demand surges once again. By addressing the issue now, we can work towards preventing a situation where prices escalate rapidly due to limited supply.
The Neighborhood Homes Investment Act is a bill that was recently reintroduced that could have a positive effect on affordability across the country. It aims to address the value gap in distressed neighborhoods by providing a new federal tax credit for the development and renovation of 1-4 family housing. This bill would attract equity investment dollars from local home investors and developers, stimulating revitalization efforts in urban, suburban, and rural areas. By closing the value gap, the act aims to combat blight, vacancy, and abandonment, prevent the conversion of homeownership neighborhoods to absentee landlord areas, and reduce racial inequity. The estimated impacts include the construction or rehabilitation of 25,000 homes, generating $4.25 billion in development activity, creating 33,393 jobs, and contributing $1.25 billion in tax revenues. Overall, this tax credit would enhance property values, increase family wealth, and improve the well-being of residential communities across the country.
I will also say, what is widely underreported is the independent investors, like the ones we work with at New Western, who are doing their part to add supply to the industry. The U.S. has 15 million vacant homes, which are being utilized to meet housing demand that builders cannot fulfill. New Western operates the country’s largest marketplace for these assets and closely monitors this data. We work with investors who are taking these vacant, distressed homes, fixing them up and making them into something livable and putting them back into the market, adding supply.
I couldn’t agree more here with Carlton. The problem, however, is that in many parts of the country investors are seen as the problem not part of a solution. In Cincinnati, for example, the Port of Cincinnati has undertaken something of a War on Housing Investors, an unhelpful and counterproductive approach to punish people improving housing because of a few bad actors.
Finally, you point out that on top of 830,000 new homes there are 350,000 rehabilitated units. Is that market going to also stay busy for the rest of this year and into next? Have inflation and interest rates not taken a bite out of those developments?
Despite inflation and interest rate impacts, the market for newly constructed and rehabilitated homes is expected to remain busy throughout the rest of this year and into the next. While home builders are adjusting their forecasts and increasing supply, the demand still outweighs the available inventory. In this environment, those who can provide housing inventory will be rewarded. Existing home listings are likely to remain low until rates approach 5%, which will ease but not immediately alleviate the ongoing supply challenge.
Since most investors borrow private money, the interest rates on these types of loans have not seen the dramatic increases that the typical 30-year fixed rate mortgages have seen. So, investors – specifically the independent investors we work with at New Western – are continuing to purchase homes and have a positive outlook on investing for the remainder of 2023. Our survey for “The Flip Side 2.0: An Outlook for Residential Real Estate Investing in 2023,” showed that 93 percent of investors plan to purchase homes in the second half of the year.
This last point about private borrowing versus mortgages is an important one and it highlights the need for private investment in housing. As I mentioned above, however, private investment from a policy perspective is being discouraged by some policy makers at the local level. Carlton’s further point that the market will remain viable for the rest of the year because of this underscores the need for flexible capital private investors provide. I remain concerned, however, that policy makers aren’t embracing this and encouraging more rehabilitation and development of rental housing. If policy makers don’t’ do this, then we finally get a correction and then a recovery, people who earn fewer dollars will face bigger problems than they should