Housing has become more and more expensive. According to National Association of Realtors, Mortgage rates have increased on average by more than a percentage point over the past 12 months. The average price of a home has also increased. Taken together and measured against household income, the Association’s statisticians estimate that homeownership affordability for the average American has fallen nearly 10 percent over the past year and stands today at its lowest level since 2011. Economics 101 would tell us that demand should ease. Yet home sales continue to rise. THE Census Bureau reports that private home sales fell slightly in October, the most recent period for which data is available, but remain some 18% above last year’s levels. Sales have held up, in defiance of standard price theory, because Americans are still very concerned about inflation.
Indeed, the behavior of the housing market, more than any other economic indicator, indicates that Americans, although aware of the recent slowdown in inflation rates, are concerned that the economy is far from being recovered from case on this issue. They fear a rising cost of living and manifest that fear by rushing for the best inflation hedge available to them – homeownership – and getting it even if it means stretching their household budgets so far. ‘at the limit. Few owners can cite numbers, but the history of the last great inflation guides their decisions. From the mid-1970s to the mid-1980s, the crushing burden of inflation of 6.2% per year followed by Bureau of Labor Statistics was further outpaced by an 8.7% increase in residential real estate value recorded by the Census Bureau. The 2.5 percentage point difference more than offset the burden of paying mortgage rates that reached double digits during that period.
For others, the logic of homeownership is compelling in an even different way, even if it means paying high mortgage rates and depleting the household budget to do so. Once the home is secured, whether financed by a cash purchase or a fixed-rate mortgage, even a high rate, the family has priced an important budget item – housing – a large comfort when we fear that all other prices will rise. unpredictably. For those wary of inflation—and most people outside the White House are—the peace of mind gained this way is well worth the budget constraints. Affordability may prevent a purchase as large or in as desirable a location as hoped, but these benefits justify a lower price distribution. And this type of purchasing has supported demand, despite rising costs.
Prices could have fallen despite this support for demand if supply had not also decreased. It appears that existing homeowners, especially those who bought at the ultra-low mortgage rates that prevailed until last year, have no desire to give up such benefits. If, for whatever reason, they need to change residence, they hold on to the original mortgage and the house to which it is attached and rent the property, further encouraged by the 11% rise in national rents recorded between 2021 and 2022. They then rent in their new location until the conditions for a new purchase are more favorable. Then they sell the old house to buy a new one. At the same time, homebuilders, the Census Bureau reports, have reduced construction of single-family homes by some 4.4 percent over the past year, and some, noting earlier rising rents, are are focused on the construction of rental properties. . Combined, this movement of builders and the relative slowdown in the supply of owned housing available for sale have supported prices in this segment of the market while causing a sudden end this year to the strong upward trend in rents.
As is often the case, the issue is more complex than simple considerations of supply, demand and prices, particularly in the case of a product like housing, which lasts much longer than a cut hair. If and when inflation fears fade and the Federal Reserve begins lowering interest rates, things will seem just as perplexing because this confluence of motivations works in reverse.