For years, we’ve been in an affordable housing crisis. Since the great recession, there has been a massive shortage of homes. Builders, of course, have been hesitant to build in droves since getting burned in 2008 and 2009. And we know that in the past few years, the prices of everything have risen dramatically. This includes lumber, land, and labor. It has become very expensive to build a home.
Then, there are interest rates. Higher interest rates over the past couple years have put a massive halt on home sales across the country. Today we’re going to talk about the critical connection between interest rates and the housing crisis we’re seeing across the United States. Click play to learn more!
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Interest rates are not incredibly high on a historical scale – but they are in comparison to 2019 and 2020. And when you combine a higher interest rate with a higher price, of course this impacts purchasing power.
Interest rates are important piece of adding supply to the housing market. More and more people are choosing to just stay in their existing home. This includes families in starter homes, older folks with empty nests, and everyone in between. It’s been estimated that more than 90% of American homeowners are locked into rates below 6%.
So unless rates drop significantly, there are a lot of people that are just going to sit tight, and forgo selling until they can find a better deal. This is of course creating a giant bottle neck in the supply – one that didn’t really exist until the last couple years.
This means trouble for the housing supply. Builders cannot afford to build. Would-be first-time homebuyers cannot afford to buy. And established homeowners cannot afford to upgrade their homes.
And all of this combined with the already existing housing shortage has created a renter nation across the country. Renting was once a stepping stone for young families, professionals starting out… most people begin adulthood renting. It can be a great way to save for a down payment, figure out where you’d like to live, build credit, and establish a life for yourself before you commit to homebuying.
Of course, there is the exception of the lifetime renter too, which is fine if that’s your preference. But across the board, that’s not why we’re seeing so many people renting. Most are locked into renting. They cannot afford to buy, they cannot afford to save for a down payment. And even if they could, the supply isn’t there… it’s a total trainwreck.
As I mentioned, this supply issue has existed for years. The affordable housing crisis is an undeniable truth… but we can’t overlook the key role that interest rates are playing in this issue. Without affordable financing, there cannot be affordable housing.
It is an interesting time for the fed, as they play this balancing act of trying to counter inflation without triggering a recession. Jerome Powell admitted that “the housing market is in a very challenging situation” with this supply issue.
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