U.S. Homebuyers Struggle Amid Chronic Housing Shortage and Soaring Mortgage Rates

Prospective homebuyers across the United States are grappling with an unprecedented challenge as they face a chronic shortage of available houses, leading to a nationwide affordability crisis. The housing market’s high demand and low supply have pushed home prices to near-record levels, while simultaneously confronting would-be buyers with the highest mortgage rates in decades. Unfortunately, there seems to be no immediate relief in sight.

Estimates regarding the nation’s housing deficit vary, but most experts concur that it’s likely in the millions. Recent projections from Freddie Mac place the country’s housing deficit at approximately 3.8 million units.

Susan Wachter, a professor of real estate at the Wharton School of the University of Pennsylvania, emphasized, “The main issue is the fact that inventory is so, so low. That’s just not going to resolve until mortgage rates come down significantly.”

The Federal Reserve initiated aggressive interest rate hikes in March 2022 to combat rampant inflation. In just 16 months, interest rates surged from near zero to a range of 5.25% to 5.5%, marking the highest level since 2001. This tightening campaign led mortgage rates to climb above 7% last year for the first time in nearly two decades, and rates have been slow to retreat, recently hitting a new high at the end of August.

Although rates on the popular 30-year fixed mortgage have slightly decreased to 7.12% this week, they remain well above both the 5.89% rate recorded one year ago and the pandemic-era lows of 3%.

Wachter explained the situation as a “whiplash” effect, with homeowners who secured record-low mortgage rates of 3% or less during the pandemic reluctant to sell their homes. This has left few options for eager prospective buyers, creating a “golden handcuff” effect in the housing market.

The number of available homes on the market at the end of August was down by more than 9% from the same time last year and a staggering 45% below the typical amount before the pandemic began in early 2020, according to a recent report from Realtor.com.

Jeff Taylor, CEO of Mphasis Digital Risk and a Mortgage Bankers Association board member, noted, “What we’ve seen a lot is that existing homeowners are saying, ‘I might be able to sell my house for $500,000, however, where do I go from here?’ So, what they’re doing is they’re saying, ‘I’ll fix up my house and maybe stay in my house.’ It doesn’t put a house on the market.”

Economists predict that mortgage rates will remain elevated through the end of 2023 and will only begin to decline once the central bank initiates rate cuts. Even then, rates are unlikely to return to the lows seen during the pandemic.

According to a recent Zillow survey, most homeowners say they are nearly twice as willing to sell their homes if their mortgage rate is 5% or higher. Presently, about 80% of mortgage holders have a rate below 5%, indicating a potential bottleneck in housing inventory.

“We’re going to need to see a several-hundred-point decrease before that inventory starts rising,” said Wachter. “At that point, we’ll see a normal market. But we’re a ways before that.”

Adding to the housing supply dilemma is the sluggish pace of new construction. New listings are being added at the slowest rate on record, primarily because many houses are still under construction. Additionally, new construction tends to be more expensive due to various factors such as zoning issues, regulations, and land availability.

The opposition to new developments in suburban communities, often referred to as “NIMBYism” (Not In My Backyard), further constrains new construction in many neighborhoods. Developers are facing difficulties in acquiring land for building homes.

This housing shortage has boosted consumer demand, keeping prices uncomfortably high despite the highest mortgage rates in two decades.

Part of the problem dates back to the 2008 financial crisis when the pace of new housing supply slowed significantly. Despite a resurgence in demand and a growing economy, housing units constructed remained consistently below historical levels.

Even more concerning is the dwindling supply of entry-level homes. The supply of entry-level housing has been steadily declining since the 2000s, posing challenges for first-time buyers.

A 2021 study published by the National Association of Realtors highlights a decades-long gap in investment in the U.S. housing market, resulting in an acute shortage of available housing, an affordability crisis, and an aging housing stock in need of repair, all of which have significant implications for public health and the economy.