Why Housing Prices Keep Rising: The Real Reasons

Understanding the factors affecting housing affordability is crucial for both buyers and sellers in today’s market. Let’s look at key elements influencing home prices and availability, such as the impact of large real estate institutional investors and the economic conditions exacerbated by the COVID-19 pandemic. From record money printing and fluctuating interest rates to the mortgage rate lockdown effect and the significant housing deficit, each factor contributes to the current affordability crisis. Additionally, the rise of institutional investors and the trend towards a #RenterNation are examined, highlighting their implications for future homeownership and generational wealth.

Key Factors Affecting Housing Affordability

The latest target of politicians is large real estate institutional investors. There are, however, many more factors contributing to the affordability crisis beyond these investors. Economic conditions play a significant role.

Firstly, during COVID-19, there was a record level of money printing, with 40% of all US dollars currently in circulation produced during that period. This excessive printing has led to high inflation, severely impacting affordability for first-time homebuyers and all buyers.

Secondly, record low interest rates during COVID-19 initially helped with affordability but also drove up home prices. As the Federal Reserve raised the overnight rate, affecting 30-year and 15-year mortgage rates, prices remained high due to previous money printing. Now, with higher interest rates, affordability is further strained across the US.

Additionally, we have created a “mortgage rate lockdown effect.” Many potential sellers have mortgages locked in at rates in the high 2% to low 3% range. With current rates around 7%, many sellers are not motivated to list their homes, as they would face higher rates on their next purchase. This reduces supply, exacerbating affordability issues due to high demand and limited supply. In Huntsville alone, we’ve seen a 4.4% year-over-year price increase.

This mortgage rate lockdown effect limits supply, but there are even larger factors at play. The biggest is the housing deficit in the US, estimated at 4 to 6 million homes, depending on the research source. This deficit dates back to the post-Great Recession era when banks stopped lending to developers, and many builders went out of business. Consequently, fewer homes were built, while new family formations continued. Over about 15 years, this has resulted in a substantial housing deficit across the US.

Rise of Institutional Real Estate Investors 

The government is currently focusing on large real estate institutional investors in relation to the housing affordability crisis. Historically, about 18% of the marketplace has been occupied by real estate investors. If 100 homes were sold, around 18 of those went to investors. Recently, this figure has risen from 18% to 25%, mainly during the COVID and post-COVID periods. This increase is due to several factors.

Firstly, the availability of cheap money has allowed Wall Street to buy residential real estate at scale and manage it effectively. Real estate is one of the best investments in terms of return on investment. Wall Street has always wanted to enter this market, and with lower interest rates, they have figured out how to do so over the past several years.

Secondly, the typical 18% of investors in the housing market were mostly small-scale investors, owning one to nine units. The additional 7% increase has primarily come from Wall Street money, large institutional investors, and iBuyers. These buyers purchase homes for cash, then either flip them or sell them to larger groups of investors with typically 10 to 99 units. There is now a lot of real estate education teaching small mom-and-pop investors how to scale up. Traditionally, this space was dominated by those with one to nine units, but now we see large-scale Wall Street money and mom-and-pop investors scaling up to 10 to 99-plus units.

Investors in the marketplace have both positive and negative impacts. There have been periods where their influence was beneficial and periods where it was detrimental. The COVID-19 period was particularly challenging because there wasn't enough supply. High demand, combined with low interest rates and still-affordable homes, meant large investors often outbid first-time homebuyers, negatively affecting the local economy. This also impacted future generational wealth for first-time homebuyers, which is a significant downside.

On the positive side, investors provide housing for people not looking to buy immediately or those who prefer renting in a single-family neighborhood instead of an apartment. Additionally, investors help stabilize local markets by buying in softer markets. During the 2008 period, they played a crucial role in market stabilization. As the market experiences dips now, investors continue to help stabilize the real estate market, benefiting everyone involved.

The Rise of #RenterNation

With many first-time homebuyers getting outbid over the past couple of years, there has been an increase in what many are calling #RenterNation. Homeownership rates are on the decline across the U.S., hitting a 50-year low. As these numbers continue to drop, you can see the predictions of smart money by simply driving around Huntsville. Every corner seems to have a new apartment complex or build-to-rent community. Wall Street and smart money are predicting this trend will continue, which is not good for the middle class or society in general, as many people build their net worth through homeownership, which is one of the practical benefits of owning a home.

The average net worth of a homeowner is $396,200, compared to a renter's $10,400. That’s about a 40-fold difference. There are also many emotional and practical benefits to owning a home, such as having a backyard for your kids to play in, more space for a home office, and other conveniences. Homeowners often have more civic pride and are more involved in their communities. This is a critical factor to consider as we see homeownership rates decline.

You might wonder how we get the stat of $396,200 versus $10,400. Is it that homeowners naturally have more money or are better savers? The primary factor is the three main benefits of homeownership in terms of wealth. Over ten to twenty years, these benefits make it easy to see how homeowners can increase their net worth to around $400,000.

The biggest benefit is appreciation. If the average home appreciates around 4% to 5% a year, or even more during the COVID-19 period, it's easy to multiply your money in ways that aren't possible elsewhere. For example, if a home appreciates 5% a year and you put 5% down, your money doubles in a year. This kind of return is difficult to achieve consistently in the stock market, metals, or any other investment. Real estate and homeownership are the best ways to do this.

Secondly, a portion of your payment goes towards principal reduction every month. When you pay rent, 100% of that payment goes to the landlord’s mortgage. You don’t get to keep any of that like you do when you sell your home or draw on a home equity line of credit.

The third benefit is taxes. The government incentivizes homeownership through tax breaks because creating mortgages helps manage national debt.

Lastly, rent continues to rise year after year due to inflation. With a fixed-rate mortgage, your payments stay consistent for 15 or 30 years, except for minor increases due to taxes or insurance.

Retirement is a significant goal for many people in this country. It’s almost impossible to retire without owning a home because rent will continue to increase annually, and you won't be able to keep up without having a paid-off house to build your net worth.

Solutions

How do we fix the housing challenge across the US and here in Huntsville? First, we can provide or consider providing tax incentives for real estate investors to sell their inventory. Focusing on small investors is crucial because they hold a majority of the available inventory, and we have a supply challenge with high demand. To address affordability, increasing supply to match demand will help slow down the affordability gap.

Long-term considerations involve monitoring Wall Street and their future goals. If large investors continue to increase their share of overall purchases and homeownership rates decline, we might need to consider legislation to slow down the buying from Wall Street investors and large corporations.

Given the affordability challenges across the US and the multiple factors contributing to it, the only way to protect yourself in this environment of low affordability and high interest rates, coupled with a 4.4% year-over-year increase in average home prices, is by owning a home.

If you don't currently own a home and are unsure if homeownership is right for you, reach out to us. We offer free buyer consultations and love working with first-time homebuyers. We'll guide you through the process and help you start building generational wealth for you and your family.