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The Housing Shortage: Affecting Buyers, Sellers, and Builders

Zillow recently reported U.S. housing stock gained $6.9 trillion in 2021, the most in a single year. Single-family homes values rose considerably faster, with the average homeowner seeing gains of $50,000. Record low supply, coupled with increased demand, dramatically drove up prices. The chief economist for the National Association of Realtors, Lance Yun, reported that, “In December, we saw record low inventory, an all-time low, there are simply not enough homes available for sale.”

Many economists estimate the U.S. housing market is short by several million homes. While new home construction has increased in recent years, homebuilders cannot catch up as long as the demand remains high. Builders have seen increased material costs, labor shortages, and supply chain issues with appliances, doors and windows, or cabinetry can delay completion for weeks.
The current real estate market, comprising of rising home prices and higher mortgage rates, makes it increasingly more difficult for the average consumer to purchase a property. Average household income has not kept pace with the increased housing costs. We would need to look back at July 2006 to find housing affordability to be this abysmal. It took about 34% of the median household income to cover the monthly mortgage payment (plus principal and interest) to purchase a home with a 20% down payment.
In April 2021, the payment-to-income ratio reached 32.5%. In past years, it would have taken a ratio above 21% to create this type of market cool-down. This excludes the past two pandemic years, which created a housing market anomaly with increasingly high demand and low inventory.
Data analysts at Black Knight believe if mortgage rates would rise a mere 50 points or home prices increase by just 5%, we would see a historically worst condition for home affordability. Adding, the 5% increase would be the more likely of the two to occur.
In an effort to offset weak affordability, homebuyers are opting for adjustable-rate mortgages with lower interest rates. According to Black Knight, the ARM share of rate locks from prospective homebuyers jumped from 2.5% this past December to nearly 8% in March 2022. By the end of May that share was over 9%, based on statistics by the Mortgage Bankers Association.
High property prices, combined with rising interest rates and supply chain issues, continue to affect those looking to buy, sell, or build in today’s housing market. Economists at Fannie Mae list these factors for their even more dismal outlook. Fannie Mae recently revised its home sales projections for 2022 downward by 3.7 percent to 6.1 million, while 2023 sales projections were lowered by 4.5 percent to 5.4 million.

Fannie does not foresee prices falling, rather sees a slower price growth for 2023. Mark Zandi, the chief economist of Moody’s Analytics, said while he is concerned about a harsh landing in the housing market, he does not foresee an economic crash like before. Like Fannie, Zandi predicts home prices stabilizing and decreasing in certain areas of the country while rising somewhat in others. Zandi adds, “The housing market has peaked…everything points to a rolling over of the housing market.”

As of Wednesday, June 8, 2022, the average rate for a 30-year fixed mortgage is 5.55%, rising 20 basis points over the previous week. Most financial experts predicted mortgage rates would climb this year, but they did so more quickly than expected, averaging over 4% for 30-year fixed-rate mortgages in mid-February. Around mid-April, it surged to 5.28 percent, the highest level since April 2010, and the uptick continues.

Adding to the above-mentioned figures, the traditional banking sector is experiencing the strictest risk underwriting measures required to grant mortgages, which means credit applications can take between 3-6 months for those looking to buy a home. This tightening of policies has opened a window of opportunity for the private lending industry.

Private lenders have seen a substantial increase in loan activity in recent months, a key indicator of exponential growth in the near future. This upturn is mostly due to private creditors’ ability to grant bridge loans for property purchases, home repairs, or construction at a more rapid and efficient pace than traditional banking institutions.

In summary, economic indicators for 2022 and 2023 forecast a continued limited housing supply, although economists expect home prices to stabilize in most real estate markets. The elevated home prices, combined with a lower consumer affordability, will increase the average time to sell a property, and most likely result in a market cool down in the short to medium term.

Ernesto Rostoker
CEO RBI Private Lending

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