2023 Housing Crisis
How Did We Get Here?
We have a housing crisis in this country and in Huntsville, AL. I know what you're thinking, how did we get here? We’ll look at how the 2008 housing crash actually started us down the path to our current crisis, how the COVID pandemic exacerbated things, and where the housing market stands in 2023.
How Did We Get Here?
Housing Crash in 2008
It all started back in 2008 when we had a housing crash in this country. As a result of this housing crash, we had fewer homes being built. Fewer homes were being built because banks were tightening up their development loans so builders and developers could not get loans to build these new communities. A lot of builders just simply went bankrupt during this crash which also decreased the overall supply.
However, we continued to have, demographically, new family formations in this country. As new home construction was declining, new family formations were increasing. The net result after 15 years is a 6.5 million home deficit, according to CNN and multiple economists.
COVID Pandemic in 2020
The housing crash back in 2008 created a 6.5 million home deficit, so there’s a lack of supply in this country. Fast forward to the COVID event and that really exposed the weakness of the lack of supply because the supply continued to go down and there were not enough homes in the market. When COVID hit, so many people who are living at home are now working from home and doing school from home which caused a lot of people to decide that they wanted a home office or extra space for the kids. That created additional demand when there wasn't enough supply in the marketplace.
In addition, the Fed did not know what was going to happen with the economy so they did the only thing that they can do to help spur economic activity, they lowered interest rates down into the 2’s and 3’s range. That ignited the housing market on fire because there wasn't enough supply but there was all this demand. On top of all the other kinds of demand from increased family formations and people wanting new homes with home offices, you also had this demand coming from Wall Street because while the regular Joe is getting interest rates in the 2’s or 3’s range, Wall Street was getting interest rates even below that. They were able to purchase a lot of these homes with great cash flow. They were buying homes in the hundreds and even thousands range which was putting additional pressure on this low supply that we already have in this country.
Post COVID Effects on the Housing Market
We have a low supply with a 6.5 million home deficit in this country and then the Fed lights demand on fire by lowering interest rates. This supply and demand imbalance is already going to start putting pressure on the prices of homes. What does the government do? They do two things that really ignite home prices and just really prices on everything in this country.
First, they sent a lot of workers home which meant they weren't producing goods not only in this country but in other countries as well so there just simply weren't enough goods. Secondly, they printed all this money. 40% of the US dollars in circulation were printed in a 24-month period so our dollar was being devalued and there was all this money chasing too few goods. That sent inflation through the roof on everything, including houses. Lack of supply, way too much demand, and all this money chasing it just made the housing market go on fire because there was so much money in the marketplace. That's why we see such high values in the marketplace today.
Housing Market Issues in 2023
In late 2022 and now into 2023, the Fed wanted to increase the demand back during COVID so they lowered interest rates. Now they want to lower demand so they are increasing interest rates to help decrease that demand. The challenge is, they're decreasing demand but they're not doing anything to affect the supply. Actually, they are affecting supply, they’re making it go down.
Last year, 2022, was the first year that we were actually getting ahead of this thing and creating additional supply. Builders were going gangbusters to create that extra supply in the marketplace, but now with higher interest rates, they're getting a little bit skittish and they're pulling back from their production of new homes. The challenge is, we are decreasing the demand in this country, but we're not doing anything about the supply. We have high prices that aren’t coming down because we have a lower supply in this country. It's almost at this equilibrium point and it’s creating a lack of affordability.
One of the ways that gets measured is by the Housing Affordability Index, which went below 100 for the first time I've seen in Huntsville last year. A score of 100 means the median income in Huntsville can afford the median-priced home and unfortunately, it’s now below 100. That will spike back above 100 as interest rates begin to rise again. But right now, we're simply in this lack of affordability situation with high prices and high-interest rates.
As a result of these high prices and high-interest rates, we're seeing a couple of things in the marketplace today. We're seeing this mortgage rate lockdown effect where a lot of would-be sellers that would turn into would-be buyers are sitting on the sidelines because they have interest rates starting in the high 2’s or low 3’s and they're just not motivated enough to move in a higher interest rate environment. You also have a situation where home affordability is affecting the number of homeowners. The percentage of homeowners in this country is at a 50-year low.
Matt’s Advice to Millennials & Renters
I was talking to a millennial the other day and I was telling them, even with these higher prices and higher interest rates, don't believe everything that you're seeing online, it's very unlikely that prices go down.
It's really important for somebody that's renting to go ahead and lock in that purchase of that first home. The reason I told them this is because when you rent, 100% of your payment is basically interest, you don't get any of that back. Yet when you purchase a home, you're starting to build equity. You build equity in three ways which is why homeowners have 40x the net worth of a renter, over $250,000 versus an average of $6,500 for renters.
They build that in three ways:
1) A portion of every mortgage payment you make, a portion of that goes back to you. It’s basically like a forced savings account that you get to capitalize on when you sell the home or when you refinance a home.
2) There are typically tax savings. Talk to your tax accountant but Uncle Sam wants you to buy a home, so he incentivizes you to purchase a home.
3) The big one is leveraged investment. I was telling this first-time homebuyer if you put down 5%, just 5% on your home and that home goes up 5% in value which is a pretty average appreciation rate, you doubled your money. Not only did you double your money, but you doubled it in one year, which is pretty much impossible to do in the stock market or almost any other type of investment. That's what makes real estate the best investment in the world and as a bonus, you have a place to lay your head at night.
Buy the home, build your net worth, and if interest rates do go down, look to refinance and that just increases your cash flow even more.
They pushed back a little bit like, “Hey, I like my lifestyle. I like where I'm at right now.” You know, as far as being able to go to Starbucks, going out, and those types of things, you know. As Dave Ramsey says, “Sometimes you got to live like no one else so you can live like no one else.” There are two recommendations I have for that person, cut your lifestyle a little bit to make those sacrifices so you can really live like you want to later on in life or get creative and find roommates to do what's called house hacking. Rent out rooms in your home so you could actually even turn that into an investment and start making money as well.
Posted by Matt Curtis on