Housing Market

MILTON EZRATI is chief economist for Vested, a contributing editor at The National Interest, and author of "Thirty Tomorrows" and "Bite-Sized Investing.” Milton Ezrati

Housing: Poised for Trouble

Some strength is left, but negative forces will predominate

For the moment, residential real estate seems to be vibrating between powerful positive and negative forces.

Their interplay will likely produce an uneven picture for the next few months. But in the fullness of time—say, late this year and certainly by 2023—the negative influences will predominate. The sector will suffer a correction, nothing like 2008 and 2009, but a correction nonetheless.

Statistics thus far paint a mixed picture. Residential construction activity remains strong. The Commerce Department reported that after a 6.8 percent jump in February, the construction of new residences rose by another 0.3 percent in March. Construction is almost 4 percent higher than in March 2021. Strength showed in every region of the country.

By contrast, the Commerce Department has also reported that sales of private dwellings in February, the most recent month for which data are available, declined by 2 percent from January and were 6 percent lower than a year ago.

Construction can’t continue to rise for long while sales decline. The only reason this state of affairs is continuing at the moment is that builders were slow off the mark when sales surged post-pandemic and are now playing catch-up.

Undoubtedly, construction also reflects a measure of speculation on a continued rapid rise in housing prices, which, according to the National Association of Realtors (NAR), have risen by roughly 15 percent nationally over the past year. In time, however, the downturn in sales will set the tone for the whole sector.

That turn will likely occur in slow motion. Whatever develops, inflation and fears of inflation will sustain buyer interest in real estate. Homeownership is one of the few ways that the average American can protect his or her assets from the ravages of rising living costs. That certainly was the case during the last great inflation in the 1970s and early 1980s. With general price pressures continuing to build as they are, people will continue to focus on real estate to the extent that they can.

Otherwise, the forces for the decline are marshaling. One of them is the rising price of housing itself. Another is the ongoing rise in mortgage rates. Together these trends make homebuying unaffordable for an increasing portion of the population. Consider that the 15 percent rise in the median price of a home nationally far outstrips the 3.5 percent rise in median family income.

Rising mortgage rates add to the pressure. The Federal Housing Finance Agency noted that the average mortgage rate has risen from 2.86 percent a year ago to 3.83 percent last February, the most recent period for which such data are available. According to The Wall Street Journal, the average 30-year mortgage rate has risen to more than 5 percent. These moves constitute a 75 percent rise in the cost of financing.

Combined, the jump in financing costs and the price of new and existing homes has increased the relative burden of supporting a mortgage on the median home by about 30 percent.

Even considering the rise in family incomes, the NAR calculates that the burden of supporting a mortgage on the median house has risen from less than 15 percent of median family income a year ago to almost 20 percent presently, making the relative burden of homeownership on balance more than 25 percent higher than it was at this time last year.

This deterioration in affordability has occurred in every region of the country. Although some areas have suffered more than others, with the greatest drop in affordability in the south and the least in the west, all show significant affordability declines. People will stretch, of course, for the sake of someone’s dream and to secure an inflation hedge. But as costs rise, an increasing number will give up on the idea of purchasing, at least for the time being.

Since the Federal Reserve is determined to continue raising interest rates, including mortgage rates, and since home prices show no sign of slowing under the influence of this country’s general inflation, housing seems set to become less and less affordable for the average American, whatever his or her desires.

A downturn becomes unavoidable. When it occurs, it will likely look mild next to the last correction, in 2008 and 2009. The nation suffers none of the extreme excesses that existed back then. As already indicated, it could occur in slow motion. But a correction is clearly in the cards.

Homeownership is one of the few ways that the average American can protect his or her assets from the ravages of rising living costs.