The Federal Reserve's partial reduction in the key rate this month and the possibility of further cuts to come this year may bolster the hopes of prospective homebuyers. However, it will take more than low prices to solve the nation's housing crisis. It may take legal action.
The law of supply and demand sets almost all prices and the housing market is no different. The principle of economics states that prices rise or fall based on supply and consumer demand. In today's housing market, the low supply of housing and high demand for it has resulted in high housing prices. However, there are many satirical forces at work.
We did not get into this situation overnight and it will take time to get out of it.
The Roots of the Housing Crisis
The housing market and home building industry never recovered from the Great Recession.
The longest post-World War II recession, the Great Recession is generally agreed to have begun in December 2007 and ended in June 2009. Some of its resulting events include the failure of Lehman Brothers, the fourth largest bank at the time. , and the bursting of the housing bubble.
In the three years leading up to the Great Recession, the housing market's mantra seems to be “build babies.” Loan applications seem to be normal, down payments are not really necessary, interest rates are low and bank savings requirements are low.
Before the downturn, homebuilders started about two million houses a year. To say that number dropped when the housing bubble burst is an understatement. In addition, home startups have never recovered.
To make matters worse, demand for housing continues to grow while supply lags far behind.
Houses Don't Last
Earlier this year, real estate listing company Zillow released a report highlighting the growing housing shortage. It found that the housing shortage has grown from 4.3 million in the previous year to 4.5 million by the end of 2022. That was despite the fact that new home construction that year was better than any year since the Great Depression.
More than 1.4 million new homes are being built by 2022. However, at the same time, 1.8 new families were established.
“The simple truth is that there are not enough homes in this country, and that's pushing home ownership for more families,” said Orphe Divounguy, chief economist at Zillow. “The problem of not being able to pay expenses also reaches employers, with almost half of the rental households are struggling. Filling the housing shortage is the long-term answer to making housing more affordable. We are in a big hole, and it will take more than the current situation to get us out of it.”
Conventional thinking, expressed by many in the housing industry, holds that zoning laws and other regulations discourage the construction of single-family homes and apartments. Indeed, many single-family homes were built and sold with the assurance that apartments would be prohibited in such areas.
However, others research shows that raising design regulations does not result in faster construction activity.
It's Not Always a Supply Problem
This month's topic is on Harvard Review argues that the market power of developers and landlords also contributes to high housing costs.
An example of this is RealPage actions. A real estate management software company, RealPage is accused of colluding with mass market landlords in order to obtain a limited profit.
The US Department of Justice, joined by eight states, the District of Columbia, and class action lawyers, filed lawsuits against RealPage.
The typical apartment management model aims for 100 percent occupancy at the highest rent the market will bear. However, RealPage, the lawsuits say, urged competing landlords to unanimously raise prices and accept lower occupancy rates. That way, RealPage's pitch went, homeowners can get a big profit with low occupancy. That combination is likely to boost a landlord's bottom lines. However, it left families and individuals in dire need of housing out in the cold.
Management is Cheaper than Rent
The combination of rising taxes and reduced mortgage rates is making homeownership more affordable, according to Zillow.
The average monthly rent for a house or apartment is $2,063 per month, Zillow reports. On the other hand, the standard mortgage is $236 a month cheaper at $1,827. Of course, owning a home also requires paying for insurance, taxes, maintenance, and repairs.
“This analysis shows that home ownership may be more accessible than many renters think,” said Divounguy. “Coming up with a down payment is still a big hurdle, but for those who can make it work, home ownership can come with lower monthly costs and the ability to build long-term wealth in the form of home equity – something you're losing as a renter. As mortgage rates drop, it's a good time to see if your ability to pay has changed.” how and whether it makes more sense to buy than to rent.”
Looking Forward
The fixed rate for a 30-year mortgage is currently 6.22 percent, according to The bank. That rate has been less than 7 percent since June.
Further reductions in rates will lead to lower mortgage rates. That will put more families in a position to buy a home.
The good news is that the Federal Reserve Bank has indicated that it will lower rates in the future. However, it may take more cuts for a long time to move the housing market significantly.
Many homeowners, who may be selling to upgrade or downsize, are hunting down the luxury of very low mortgage rates. Prices will have to be steep to make the sale financially sound for these people.
“I don't expect to see a significant increase in the supply of existing homes for sale until mortgage rates have fallen in the low 5% range, so probably not until 2024,” said Rick Sharga, founder and CEO of the CJ Patrick Company, a financial advisory firm. , was told Forbes.
While 2024 may not be the year the dam breaks in the housing market, it may be the year the cracks start to show.
Zillow reports that the price is Homes on the market are up 22 percent year over year. The company is also seeing real estate sales grow modestly. Zillow says 4.1 million homes will be sold by the end of this year. In addition, it expects 2025 to see the sale of 4.3 million homes.
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