AMAC Exclusive – By Andrew Abbott
After almost two years of record sales and skyrocketing prices, America’s hot housing market looks to be cooling off. But even as home prices drop, rising interest rates are continuing to drive monthly mortgage payments higher, and many potential buyers now face the threat of being financially locked out of homebuying entirely.
In June, the median price for an existing home hit $416,000, up 13.4% on the year and the highest figure since records began in 1999. However, actual home sales fell 5.4%, the fifth straight month of declining sales. Homebuying sites like Realtor.com and Redfin are also reporting that many sellers have been forced to cut prices as homes remain on the market longer and longer. Daryl Fairweather, chief economist at Redfin, told the Wall Street Journal last week that “the days of bidding wars and homes selling for tens of thousands of dollars over asking are over.”
But even as sale prices decrease, buyers aren’t getting a better deal. As the Fed hikes interest rates to desperately try to curb inflation, monthly mortgage payments are now 60% higher than they were just a year ago.
For many would-be first-time homeowners, this means their dream remains just out of reach – particularly as inflation and the ongoing recession threaten the financial stability of many families. Though home prices increased more than 14% between June of 2021 and June of 2022, real wages decreased 3.6% in that same period. With experts predicting that inflation will continue to be a problem for the foreseeable future and average monthly mortgage payments continuing to rise, it seems likely that buying a home will become more difficult in the months ahead, even if prices come down.
The roots of this burgeoning crisis go back to early 2020, when the appetite for homebuying exploded throughout the country. A combination of remote work options, limited social gatherings, and historically low mortgage rates incentivized millions to enter the market. Stimulus checks from the government also helped many Americans save for a down payment on a home.
At the same time, strained global supply chains meant that the price of everything from wood to concrete increased dramatically. According to NPR, “The futures price of lumber in March 2020 was $303.40 per thousand board feet. That cost more than quintupled over the following 14 months, reaching a high of $1,607.50 this May.” Many companies that once supplied homebuilders went out of business entirely, putting even more strain on those suppliers who remained.
This combination of factors drove prices to record highs. Between the onset of the pandemic and the record high in prices seen this summer, prices increased about 44%.
The pivot point to avoid the current looming crisis came in early 2021, as the pandemic began to recede and many states eased restrictions. If at this point Biden had prioritized bolstering supply chains and restoring economic stability, it is likely that prices would have begun to cool slightly while sales remained steady.
Instead, Biden worked with Democrats in Congress to pass the $1.9 trillion American Rescue Plan and the $1.2 trillion infrastructure bill, fueling an inflation fire that has now grown out of control. With the country now in an apparent recession, it’s likely that the Fed will have to continue raising interest rates to combat inflation, with some experts predicting that rates could reach 6.7% by 2023 and 8% by 2025. If current developments are any indication, such a dramatic rise in rates would be catastrophic for the buying market, and would force many Americans to remain renters rather than owners.
In addition to many Americans being unable to afford homes, the real threat now is that the country may face a housing bubble similar to what occurred in 2008. While the 2022 housing market is different in some ways from 2008, the consistently overlooked fundamentals of economics paint a stark picture. Demand will decrease as more Americans are priced out of the market by high prices, mortgage rates, and inflation. There will likely also be some “demand destruction” as a significant minority turn away from homebuying completely. Thus, demand will fall along with housing prices. Just as home prices cool, a glut of new housing developments, delayed by COVID or inspired by the hot market in 2020 and 2021, will be completed, further increasing supply and dropping prices.
This would be great news for aspiring homebuyers. But just as the country saw in 2008, a massive surge in supply is bad news for the economy as a whole if no one can afford the homes available. This may yet deepen the recession the country already finds itself in, destroying hopes of owning a home for millions of young families. Avoiding such a scenario is critical in preserving the promise of the American Dream for future generations.
Andrew Abbott is the pen name of a writer and public affairs consultant with over a decade of experience in DC at the intersection of politics and culture.