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Housing Shortage or a Bubble?

residential construction

The great recession left scars on many of us. Over-speculation of the housing market combined with deregulation of the mortgage and banking industry led to a giant pop of the bubble. Signs of the bubble appeared in 2005 as the absorption rate for housing in many cities started to slowly decline from its high. In 2006-2007 we saw average housing prices hit its peak. Then in 2008 Lehman Brothers collapsed. The entire country’s eyes were opened. 

Builder’s didn’t just lose their money; they lost their confidence. In the past 17 years new construction starts have been substantially depressed. The chart below shows permits and new housing starts in the US since 2000. You will see the substantial decline starting in 2005.

While we were focused on the collapse of our economy and the loss of homes, something was taking place outside of our periphery. Our eyes were closed to the largest population growth we’ve ever experienced coming of home buying age.

This isn’t a real estate bubble. This is a housing shortage.

Millennials are 82 million strong and currently range from ages of 25-39 years old. Hot on their heels are Gen-Z making up 86 million of our US population. If you overlap the two graphs above, you will see one important factor that has created this national housing shortage.

Still think it is a real estate bubble?

In 2004-2005 it was as easy as fogging a mirror to get a mortgage on a home. This created an unusually high demand for home buying, allowing people who would not normally qualify for a mortgage to get one more than they could afford. 

With the lack of all of the metrics and reporting we have today, builders inadvertently overbuilt for the demand. This quickly turned the tables of supply and demand causing housing prices to fall. As prices started to fall, and adjustable rates mortgages came into play, many homeowners could no longer afford their home. Actually, they couldn’t really afford it when they bought it.

What is different in this housing market?

So many factors! Here are a few to illustrate the difference of the housing market now versus then.

  • Dodd–Frank Wall Street Reform and Consumer Protection Act changed and reorganized the financial regulatory system. Gone are the days of fogging a mirror to get a mortgage. Income verification, employment verification and transparency are the “new way” of doing things to help prevent future financial crises.
  • The “Great Resignation” and other factors have created labor shortages across all industries and work classes. This hit has fallen particularly hard on the hospitality and housing industry. No laborers = no hands to build the needed homes.
  • Supply Chain issues! Yep, we have to talk about those too! Factories across the globe have had multiple shutdowns to prevent the spread of Covid decreasing the supply. Ports have experienced overwhelming backlogs. Trucking companies do not have enough truckers to deliver the goods. And the list keeps going on!
  • Costs of Construction – Supply chain back-logs combined with trying to build enough homes to recover from 17 years of depressed construction so we can meet the demand of our explosive population growth has created a substantial increase in construction costs. With the shortage of supplies and the ever-growing demand, the National Association of Home Builders has reported an increase of nearly 19% for the costs of residential construction material since December 2020. Then pile on some inflation.

So it isn’t a bubble but when will it end?

This is usually the point when I bring out my Magic 8 ball 🙂 Every expert in the financial and real estate world wants to answer this question. Unfortunately this equation isn’t one that is easy to solve. 

The rise of interest rates throws another unknown variable into the equation. Picture this…

  • At a 3% interest rate (a.k.a free money) a qualified individual can purchase a home with a loan amount of $575,000 and have a monthly payment (not including taxes and insurance) of approximately $2400. 
  • With a 5% interest rate, to maintain the same monthly payment, a buyer would only be able to get a home loan for $450,000. 

That is significantly less purchasing power in a market where pricing continues to skyrocket and supply is crippled.  Keep in mind, the average US home price in the 4th quarter of 2021 was nearing $500,000. 

Unfortunately the solution isn’t simple. One factor is apparent, we have a long-term housing shortage on our hands and none of the variables are helping ease the pain. 

We would love your feedback and comments to the information above. Ideas and creativity help us find solutions. 

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