As long as rates stay low, this will continue. The only time in the decade we saw inventory climb year over year was when mortgage spiked rates from 3.7 percent to 4.8 percent in the latter half of 2018.
2. ‘Buy low, sell never’
During the past decade, just as real estate holding costs plummeted, income on properties climbed. Innovations like Airbnb combined with an explosion of alternate dwelling units (ADUs) meant that single-family homes are much more likely to generate positive cash flow than ever before. It’s been an excellent decade to own real estate.
The hangover from the bubble burst 12 years ago meant that homebuilders built about half as many homes for most of the past decade and are only now reaching long-term normal construction levels. This phenomenon limited the growth of housing supply, exacerbating the effect of low-interest rates on existing supply.
Underbuilding has led to an ironic twist in the market: would-be sellers are afraid to list their homes because there’s nothing to buy. The cycle perpetuates.
We’re now well into the millennial era — there are more millennials than any other generation, and this crowd is coming into its peak years for earning and homebuying.
We have a solid five to 10 years of millennial demand in front of us. At the same time, boomers have had inexpensive mortgages for years, and they’ve held on to their homes much longer than previous generations.
5. Homeowner-focused policy
The CARES Act foreclosure moratorium has kept some properties from coming to market, staying instead in the hands of distressed owners. But the foreclosure pipeline was already at record lows before the pandemic hit, and Americans have gained a trillion dollars of home equity since then.
As a result, pandemic-distressed homeowners seem unlikely to add to our inventory any time soon. Although there are still 2.5 million homeowners in the mortgage forbearance program, many of whom have not made a mortgage payment in a year, these homeowners have gained significant equity wealth in that time.
People default on a loan when the deal is not worth saving, or they’re upside down on the value. Very few people are facing that situation this time around.
The fact is that policymakers have been focused on keeping people in their homes. Essentially all U.S. housing policy, whether tax, mortgage markets or pandemic-related, is aimed at helping people who already own their home, often to the detriment of new buyers.
What will help us emerge from the crisis?
The most important factor is mortgage rates. As rates fluctuate over time, look to a 3.5 percent threshold where consumers start feeling the pinch of higher payments. This will change the calculus of what they buy and also what they hold onto or sell to finance the new move.
New-home construction is also finally climbing and will begin to add a little to the market. More construction will be critical for boomers to move into retirement and millennials to get their first homes.
We also really need to change the focus of policy from homeowner-centric to housing market-centric. Loosening policy on foreclosures and construction would help, as would more flexible property tax rates that would keep fewer people locked into low-tax basis properties.
The good news is that in this crisis, Americans have gained trillions in wealth. Even those most tragically affected have been able to stay in their homes and benefit from large increases in equity. And there’s still tremendous demand waiting to be unlocked — if we can create the conditions to do so.
BY MICHAEL SIMONSEN
Michael Simonsen is the co-founder and CEO of Altos Research.