In today’s unaffordable housing market, high mortgage rates are only part of the problem. Potential buyers also face a shortage of long-term housing.
More than a decade of underconstruction has left the country with a deficit of nearly 1.5 million new homes. At the same time, current homeowners who keep their mortgage rates lower freeze their resale inventory in what’s called a “rate lock-in effect.”
When pent-up demand exceeds supply – in this case, for both new and existing homes – prices rise.
In 2023, active housing inventory levels reached an all-time low, but experts believe this trend will slowly reverse. “Improved availability of homes for sale will allow for a better balance between buyers and sellers, which means fewer bidding wars and price gouging,” said Selma Heppchief economist at CoreLogic.
However, even with a expected increase of 11.7% this year, the number of homes for sale will still lag 23% from pre-pandemic levels, according to Realtor.com. Given the ongoing housing shortage, conditions will likely remain difficult for buyers well beyond 2025.
“Inventories will increase, but supply will remain low by historical standards,” said Lisa Sturtevantchief economist at Bright MLS, a multiple listing service operating throughout the Mid-Atlantic.
Other variables also come into play, including the Federal Reserve’s forecast that there will be fewer interest rate cuts and President-elect Donald Trump’s economic policies, which are expected to be inflationary and potentially delay the market’s recovery real estate.
Basically, any significant growth in housing stock would require a sharp increase in resale registrations and a significant increase in new construction. Both scenarios would depend on lower inflation and continued interest rate cuts by the Fed to reduce borrowing costs for consumers and businesses. Here’s why.
Where have all the houses gone?
The COVID-19 pandemic has clearly marked a turning point for the real estate market, and not just due to the shortage of building materials from disrupted supply chains. As lockdown measures came into effect, demand for housing increased as families moved for more space and millions took advantage of record-low mortgage rates, around 2-3%.
The result has been a red-hot seller’s market, with existing homes snatched up and prices rising rapidly. Millions of homeowners were also able to refinance and benefit from favorable rates, providing more incentive to stay put.
Today, 84% of current owners have interest rates below 6%and average mortgage rates are not expected to fall back to levels below 6% in 2025. If homeowners listed their properties and moved now, they would end up with a significantly higher rate on a new home loan – and then some. expensive monthly payments.
For households who have been unable to afford to sell their property in recent years, the decision to move will depend less on mortgage rates and more on lifestyle changes, said Ali Wolfchief economist at Zonda, a home construction data company. Big life decisions, like moving for work, having children or getting divorced, could prompt more sellers to give up their attractive interest rates in 2025.
Are certain regions experiencing an increase in stocks?
Housing supply has seen a gradual return in recent years, although some areas have recovered much more quickly than others.
For example, the states with the lowest supply are concentrated in and around the Midwest and Northeast, where there is less available land on which to build and where the rate lock effect is stronger. But in the South and West, where new housing construction is more widespread, housing supply is approaching or even exceeding pre-pandemic levels.
In areas where new construction is scarcer, supply will depend on falling mortgage rates and provide enough incentive to keep sellers out. Rates below 6% are not low enough to completely break the rate lock-in effect, but a gradual easing of borrowing costs will at least help mitigate it.
Nonetheless, if mortgage rates plunged to historic lows again (amid a major economic crisis), buyers would likely flood the market to compete with limited inventory, which could cause home prices to rise again. ‘real estate.
To improve affordability, house prices and mortgage interest rates should ideally move toward equilibrium at the same rate.
Will there be an increase in new construction?
On the eve of the 2007 financial crisis, the construction of new housing was on the risepeaking in early 2006. By 2009, new construction had declined by more than 125%. Today, housing starts are nearly 50% below pre-Great Recession levels.
In addition, builders have given priority to the construction of larger, more expensive single-family homes and multi-family housing to meet changing buyer demographics and higher net profits. This shift has led to a decline in the construction of starter homes, such as smaller (typically 1,500 square feet or less) low-cost properties that help low-income families achieve homeownership.
“We are witnessing the death of the first house in almost a decade,” said Brittany Webbresearch director at the National Housing Conference. This makes it especially difficult for first-time home buyers to find affordable housing in areas where they want to live.
Over the past year, home builders have slowly begun to turn to build smaller houses with lower price tags. Newly constructed housing tends to cost more than existing housing, but experts predict this price gap will narrow in 2025. However, much of this depends on supply chains, material costs and construction rates. ‘interest.
“Lower rates will likely lead to more favorable lending terms and lower construction costs for homebuilders, making new projects more profitable and spurring additional housing construction,” said Odeta Kushideputy chief economist at First American Financial Corporation.
Will the real estate market stock change in 2025?
There is much uncertainty surrounding Trump’s proposed economic policies and the extent to which they will affect the housing market and monetary policy in 2025.
Some campaign proposals, such as easing land use regulations, could encourage development and increase housing stock. Other proposals, including tariff and tax cuts, could lead to higher inflation and prevent the Fed from making additional rate cuts.
Higher tariffs, especially on lumber, are a big concern for builders, said Robert Dietzchief economist at the National Association of Homebuilders. Rising construction costs could hamper housing construction and drive up prices of newly built homes.
Additionally, if interest rates remain high, home builders will be less likely to use construction and development loans to finance their projects, and current homeowners may be less likely to put their homes into sale.
Still, many have expressed enthusiasm for Trump’s deregulatory proposals and his promise to sell federal land to developers for housing construction. “Homebuilders are optimistic about the extension of the 2017 tax reform and efforts to reduce regulatory burdens at all levels of government,” Dietz said.
State and local governments should also relax their zoning and land use laws to make building homes easier and less expensive. This could take a long time, especially in areas where residents are opposed to more development.
How to deal with the current housing shortage
There’s little potential buyers can do about high mortgage rates that lock up existing inventory or the pace of home construction. But there are ways to find a home within your budget, even when inventory is tight.
Broaden your housing search: Housing inventory varies by each state and metropolitan area. So even if you want to put down roots in a specific place, it’s worth keeping an open mind. Lesser-known areas or submarkets bordering urban centers might offer a wider range of options better suited to your budget and preferences.
Consider renovations: If you’re comfortable with the potential cost and duration of renovations, homes undergoing renovations or older homes tend to offer more affordable asking prices. You’ll also benefit from less competition and/or bidding wars that are common in turnkey properties.
Search for something new construction: If you live in an area where there is a lot of new construction — such as in the South or West where there is more land available for development and more favorable zoning laws — you may be able to -be buying a new house at a certain price. similar or even inferior to a used model. To attract buyers, many builders offer all kinds of incentives, including mortgage rate buydowns, reduced prices or closing cost assistance.
Learn more about today’s real estate market
