By Josh Mettle, Guest Writer
By now, everyone knows that the demand and the number of transactions in the housing market have seen a significant slump as homebuyers delay purchasing a home in hopes of improving affordability.
Nationally, home prices are still at all-time highs, and in October 2023, the average 30-year fixed mortgage rate hit a 23-year high cresting above 8%. Despite higher mortgage rates and a lack of affordability, there are still less than 900,000 homes for sale nationally (77.5% fewer homes for sale than in 2010). That is continuing to push up prices despite the common narrative that the housing market is crashing.
How is this possible? Most would assume that when homebuying costs skyrocket, demand would significantly drop, homes would flood the market, and the 2008-2010 housing crash would repeat. Yet here we are, looking at a housing market with anemic inventory and prices still very high nationally. What gives?
Let’s dive into what got us here and what it might take to see more homes come to the market in the coming year.
Why Are There So Few Homes for Sale Right Now?
The housing market is highly unusual right now, and it has been for a while. In fact, since the pandemic, the US housing market really hasn't been “normal” at all.
The housing market came to a halt in early 2020 as the world stopped, and then it took off like a rocket. Fueled by 30-year fixed mortgage rates under 3% and the work-from-home movement, demand for homes absolutely exploded.
Massive demand from those who were waiting to move up when homes became more affordable collided with an already record-high wave of first-time homebuyers entering the market (the average age of a first-time homebuyer in the United States is 33 years old). Sixty-six million millennials were coming of age, forming new households, and looking to buy homes.
At the same time, current homeowners and investors took advantage of low rates to purchase second homes and investment properties in the hopes of profiting off the growing rental market (Airbnb and short-term rentals were all the rage).
This quickly depleted the supply of homes on the market, which was already trending downward thanks to a lack of new-home construction after the 2008 housing crash. As foreclosures and short sales skyrocketed in the Great Recession, builders significantly pulled back on new construction and, as a result, decimated inventory levels. They've been trying to catch up for the last decade, but it just hasn't been enough to keep up with the growing housing needs of Americans.
Take a minute to digest the graph below. From 2004-2014, housing completions (supply of new residential units) exceeded household formations (demand from new buyers) for a decade.
In 2006, something odd happened; household formations saw a large drop while housing completions hit an all-time high. This drop in household formations was due to the decline in birth rates in the 1970s—attributed to the 1973 Supreme Court decision in the Roe v. Wade trial legalizing abortion—and contraceptives becoming mainstream. This resulted in a huge drop in household formations 33 years later.
From 2015-2023, the exact opposite has happened. The millennial generation has been pushing household formations back to similar levels that the Baby Boomer generation experienced, and the builders cannot keep up. Household formations have crushed completions for eight years, and there’s no end in sight. Homebuilders are still not building enough to meet demand, likely due to higher construction costs, construction interest rates, labor shortages, and bureaucracy at the municipal level that can often delay construction projects for years.
At the current pace, we expect to see 1.41 million new housing completions and 2.07 million household formations in 2023, meaning we are still running a deficit of around 600,000 housing units in 2023. When demand for housing (household formations) exceeds supply (housing completions) for a decade, odds are that prices will continue to rise.
More information here:
How Our Portfolio Performed in 2023 (Including Real Estate!)
Your Crystal Ball Predictions for 2024
Will Low-Rate Mortgage Holders Ever Sell Their House?
Another unique issue affecting housing supply is a concept known as mortgage rate “lock-in.” Today’s homeowners have such low mortgage rates that they either won’t sell or they simply can't sell and take on a more expensive housing payment at a higher rate.
And this isn’t just a small number of homeowners. Keep in mind that one-third of all residential homes in the US are owned free and clear with no mortgage. Of those homes that do have a mortgage, nearly two-thirds have an interest rate at or below 4%, and nearly a quarter have a rate below 3%. Most of these homeowners will not budge and will continue to enjoy their low, fixed-rate mortgage for many years to come.
Why would these owners ever want to sell? Why wouldn’t they rent out their homes and enjoy the cash flow from rents that have been pushed higher due to inflation while benefitting from their 30-year fixed mortgage rates that are well below the real rate of inflation?
Existing home inventory listings climbed 1.4% month over month in September 2023 but remain below inventory levels this time of year in 2022, 2019, 2018, and 2017. Listings dropped 8.9% on a year-over-year basis in September and remained far below pre-pandemic levels.
Will More Homes EVER Hit the Market?
This new reality of low housing supply is likely to persist for the foreseeable future as those fortunate homeowners with 30-year fixed-rate mortgages at or below 4% now realize they have two assets: their home and their below-market fixed-rate mortgage. Why would they sell? What housing situation could possibly cost them less than what they already have?
More information here:
Rates Are Rising: How to Navigate Buying a Home in the Current Market
Won’t a Recession Cause a Housing Crash?
Many believe that economic turmoil and a recession will bring a rush of homes to the market, but we see that as very unlikely for a couple of reasons:
- Homeowners today have massive amounts of home equity and record low mortgage interest rates. If they lose their jobs, it's likely they can fall back on their home equity. They can either tap existing home equity lines, borrow from family or private money sources against their homes, or simply rent out their home and pocket the positive cash flow.
- Recessions are deflationary by definition and bring lower mortgage rates. Lower rates create greater affordability and lure those waiting on the sideline into the market.
The clear outlier here is the Great Recession, which was primarily caused by a subprime mortgage credit bubble, declining household formations (huge drop in 2006), and home builders who completed record housing units in the decade leading up to the Great Recession.
Should You Buy a House Now or Wait?
If you look at the history of home prices, trying to time the housing market is a losing game. Going back to 1942, home prices were up nationally for 73 years, down for seven years, and flat for one year in 1955. That means the housing market has a near 90% win rate. Who wants to gamble when you lose 90% of the time?
Where Is the Investment Opportunity in 2024?
Airbnbs, short-term rentals, and mid-term rentals may be in for a tough 2024. I see two headwinds for this investment class that have me currently turning my three privately owned mid-term rentals back into long-term rentals.
The wave of pent-up vacation demand post-COVID lockdowns is largely behind us. The massive personal savings increases that occurred during lockdowns have, by and large, been spent. We are now seeing credit card balances hit new all-time highs and personal savings rates plummet well below long-term averages. This tells me the American consumer is about tapped out and is not likely to spend big on expensive vacations in 2024.
The unemployment rate is also on the slight rise and historically a rise off the cyclical bottom has been a harbinger for recessions. Unemployment bottomed out in April 2023 at 3.4%, as of December 2023, it was up to 3.7%.
If the unemployment rate rises in 2024, we will enter a recession, forcing both companies and families to spend less on discretionary travel. That tells me 2024 will not be a great year for short- or mid-term rentals.
But long-term rentals should do quite well in 2024. Going into the Great Recession, I owned 63 single-family homes in Salt Lake City, all with long-term tenants in them. I watched the Great Recession unfold, and I was certain I was going to lose everything. But all those people who walked out on their homes and gave the bank back their keys still needed somewhere to rent. As it turned out, I had a lower vacancy rate and higher rental rates and collections during the Great Recession than I had in the run-up years from 2000-2006.
Over the last 23 years of owning long-term single-family rentals, times of recession and economic uncertainty have been some of the best times to own property. This is a period where some people are forced to exit homeownership and rent for a period of time. Additionally, mortgage rates drop precipitously in recessions, giving investors the opportunity to refinance to lower rates and to pull tax-free cash out to acquire additional rental units.
Those of us sitting on fixed rate mortgages below 5% should consider turning our current primary residences into long-term rentals, because it’s highly likely most people would see positive cash flow due to the massive run-up in residential rents since COVID.
More information here:
6 Reasons We Lost Money on Our First Rental Property
3 Strategies Home Buyers Should Consider in 2024
- Buy before the seasonal summer buying season. Historically, the greatest opportunity to buy a home with a discount or concession from a seller is in the winter months. There are fewer buyers (competition) in the market, and many are consumed with the holiday season. The slowdown in demand can make sellers who need to sell fast feel nervous.
- Refinance when rates go down. Nobody knows for sure when rates will reverse and go the other direction, but we do know that mortgage rates are cyclical. They historically follow inflation, which follows the business cycle, and after a huge run-up, it's now already starting to swing in the other direction. As the unemployment rate climbs, inflation will fall, and so will mortgage rates. Waiting to buy until mortgage rates fall will inherently put buyers in a more competitive environment.
- Consider making an offer to acquire the property subject to the existing financing. If you have cash, you could possibly pay the seller their equity while taking over their existing low-rate mortgage. Wendy Patton has acquired hundreds of homes with this investment strategy and recently updated and rereleased her book on this topic called Investing in Real Estate with Lease Options and Subject-To Deals.
My main point here is that, despite all the negativity around the US housing market, there are just as many (if not more) reasons to be bullish on residential housing than there are reasons to be bearish. With US housing going up nearly 90% of the time, your odds of timing the market to get a better deal are not great.
But who knows, maybe Warren Buffett—who has said that only an idiot tries to time the market—is wrong this time.
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Do you have home-buying plans for 2024? What worries you about the possibility? What makes you excited?
Excellent explanation and analysis of residential housing market, even for someone who is not a real estate investor. In discussing household formations and their lag of falling birth rates, I wonder about recessions/depressions as the driving force – 1930s, 1970s oil shocks, late 1990s dot.com bubble and Great Recession of 2008-?. Will be interesting to see at what interest rate folks start to place homes on the market and this supply-demand mismatch starts to clear. Look forward to an update in the future.
Thanks for the kind words about the article, I’m glad it was informative. There is a lot of discourse on the topic of what rate will thaw the housing freeze. Meaning, sellers sitting on 3% mortgages don’t want to trade homes for a 7% mortgage. It’s my belief that it’s not an all at once moment, it’s going to be more like an ice cube melting. As rates trend towards 6% and I believe high 5% range, more and more people will bit the bullet and move. This of course will create some inventory, but on the other hand, renters will be enticed off the sidelines. At the end of the day, household formations have exceeded housing completions since 2015 and there is a lot of pent up demand. If they can afford the payment with lower rates ahead, that will bring more demand into the equation and increase the number of real estate transactions. I believe that’s what we will see in 2024.
We bought in 2022 in a market so hot we offered above asking on a property hours after it was listed. Only our realtor and daughter in that town saw it in person. (And we closed a few days before the grandkid calling us to the new town was born.) Wisely if sadly not timing the market, we paid off the 3% mortgage promptly given that our alternative investment for that money would have been 1% or lower CDs.
Happily retired and busy with grandkids, spouse assures me we didn’t want or need to use that money to pay cash for a fixer upper or rental property ourselves, paying off the 15 year mortgage on our own home rather than borrowing at much higher rates to become a landlord.
Since then we’ve seen multiple empty houses in our neighborhood and our short street and many older homes being slowly repaired in the tight labor market (some as an after work side job for the owner). Several not so attractive homes for sale for many months and some of the updated ones going up for rent rather than sale or owner moving in. We figure the hold outs were overly optimistic. (We had gotten the retainer back ourselves on a cute home with recommended repairs over $30K – including some hazardous issues- when the sellers wouldn’t budge on price. It sold several months later for the amount of our final offer before we bailed.)
In summary our experience in this expanding town fully supports your article’s points. Further I believe (we haven’t been quizzing neighbors about their living arrangements) many ‘single family’ homes nearby are occupied by families with unlaunched adult kids or multiple roommates- their garages and driveways are overflowing with cars. We’re tempted to rent out a room in our place except not all our own kids are fully launched. I also threaten spouse with buying the house next door to raze it to the ground and build a pool and expand my vegetable garden (idle threats- after 20 years of pool ownership we’d settle for a hot tub).
I don’t have much to add here. I just wanted to say this was an excellent article. Extremely well written and informative. Your analysis is tight and clear. Now, you could be wrong, but you fully acknowledge that. Obviously some unknown “X” factor could dramatically change the circumstances on the ground (war, technological wave like AI, etc.). Anyway, I read every article on this blog. They are all quite good, but this one was exceptional. I would love to hear from you more!
Really appreciate the comments and feedback. It’s my intention to be as balanced as possible and not to blind by the risks. This is challenging because real estate has both macro and micro trends, meaning I could be right nationally, but in your town, I could be dead wrong. Both local and national trends should be analyzed and we have some great local tools if anyone wants to reach out to me, I’m happy to provide ([email protected]). Lastly, just let me say that I’ve acquired two single family rental properties in Salt Lake City in the last 90 days. I’m literally putting my money where my mouth is.
I thought this article was great. Informative, compelling and well-written. The housing situation is complex.
I worry about housing all the time (even though I am not looking to move any time soon). I especially worry for young families who would benefit from a first home purchase, but find it unaffordable to do so. And whose only alternative is to stay in a punishing rental market.
Ultimately, it seems like the housing affordability issue is a supply/demand problem… and that we may benefit from finding ways to increase home constructions (supply). I personally hope for a significant decrease in housing prices.
Dr. T I feel the same way. I have a 14 and 12 year old and fear they will not have the same opportunities that I did when I bought my first condo at 19. I’m also optimistic, that those who really want to buy will find creative solutions like house hacking with friends, etc. I also just conducted a search across the Wasatch Front (greater SLC) and found 362 condo, homes, etc. under $360k sales price. We just introduced a new program that provides up to 2% down payment as a non-repayable (free money) grant for first time buyers. My point is, there’s always challenges and I hope parents work with their kids to help them find ways to get into homes.
This was an informative article! We own a condo outright in SW FL, and are selling and looking to relocate elsewhere and are in a pickle as to what, where, who, as the trends here are very different than across the U.S. Again, you just never know!
Jaimie we have access to professional real estate analytic tools that can provide you very detailed and insightful information about local markets. Email me and I can run them in whatever areas you want to better understand market dynamics.
Thanks for this writeup. My wife and I (finally) bought after two full years of looking, waiting (or better, hoping?) for a housing bubble burst that never burst, making offers at or over asking price, being outbid, and being forced to progressively up our budget. In our locale, my sense is that the market has reached a sort of plateau; houses are staying on the market longer, but prices aren’t really falling. (Of course, some of the house prices are falling, but those were staying on the market for months even at the tail end of the frenzy, for various reasons.)
We really wondered whether or not we were making the mistake of buying right at the tiptop of the market frenzy, but while we were content to hunker down in our 1900 sqft house with two kids, when kiddo #3 made an appearance this summer (and after two years of increasing amounts of cash languishing in accounts in anticipation of being used ‘in five years or less’) it was time to bust a move. Although I know confirmation bias is a thing, this article and other similar ones give me some reassurance that we did make a rational decision.
Time heals all wounds in real estate. If you stay there long enough, even if it goes down in value it’ll come back eventually thanks to inflation. Zillow tells me the place I bought for $138,000 in 2006 and sold in 2015 for less than that is now worth $241,000.
This was helpful for those of us looking to buy but feeling housing is over priced and wondering if we should would wait for a pullback. I like everyone else expected significant price decreases in home listings after the run up in interest rates but we haven’t really seen that in the area we are looking to buy in. There are some homes sticking around on the market for longer but we haven’t seen prices come down too much sadly.
But I wonder if the boomers aren’t distorting the market beyond just occupying their homes for longer. Our neighborhood is upper middle class I guess, and my wife and I have been surprised by the number of younger families than us coming in and buying tear downs and building a new home. We talked with a realtor and we were told many of the families she had worked with in our neighborhood were getting large gifts from their parents to be able to afford it. If this is happening at large scale, we may be seeing the effects of the great wealth transfer already.
William there are so many factors at play here, I definitely see that wealth shift being one of them. We see kids inheriting homes, selling them, and placing huge down payments on homes they intend to live in, but would be well outside their budget were it not for the inheritance. As I sift through all the factors, the biggies are housing completions not keeping up with household formations, mortgage rates, and of course the economic vibrancy (or lack thereof) in your local market. If your local economy is strong (jobs and wages growing) and if rates continue their trend lower since last November, I think housing prices will slowly grind higher in the 4 to 5% range.
Good analysis of data. How do you analyze new households and the number of residents per household? Do you just use an average of 2 residents?
Another factor is the length a mortgage is held. After half the term more equity is going towards the balance. Those who have held the mortgage for half or more would not want to drop back to paying more towards interest and at a higher rate – another reason to stay put.
Markets must vary greatly by region, are there good statistics for specific regions or metro areas?
Thanks, Ed
Interesting article! One thing that came up a few times which I don’t understand – the idea that current homeowners can just turn their primary residences into long term rentals. How is that supposed to work? If you go buy somewhere else, you are exposed to the high valuations and mortgage rates. If you go rent, why would you come out ahead vs what you would be charging someone to live in your place?
Doesn’t seem like something you can “simply” do to just pocket extra cash.
This was an incredibly informative article! It really got me thinking about the current housing market and the different strategies homeowners might consider. One thing that stood out to me is the suggestion that people could turn their primary residences into long-term rentals. While that sounds like a viable option on the surface, I’m left wondering how it would actually work in practice.