Housing Affordability Crisis Deepens as Starts Plunge, Prices Soar

The Emerging Housing Affordability Crisis

Housing affordability in the U.S. is emerging as a significant issue, altering the market in ways that may prove challenging for both homebuyers and builders. Recent data shows that housing starts plunged 11.3% month over month in August to 1.283 million, the lowest level since June 2020. On a yearly basis, housing starts fell by 14.8%, significantly below the 1.435 million units economists had forecasted.

Effect of High Mortgage Rates

According to Robert Dietz, the Chief Economist of the National Association of Home Builders, high mortgage rates are affecting both builder confidence and consumer demand. A growing number of potential buyers are choosing to delay purchasing a home in the hope of more “favourable long-term rates.” This trend became evident after homebuilder sentiment dropped below the critical break-even measure of 50 for the second month in a row.

Implications for Current and Future Housing Supply

The current situation may cause problems for both existing housing dynamics and future supply. Numerous homeowners are still holding onto mortgages taken out at the start of the COVID-19 pandemic when rates were 3% or lower. Consequently, these homeowners are not eager to leave their current properties. Meanwhile, builders are apprehensive about constructing new homes that prospective buyers might struggle to afford, resulting in many of them opting out of new projects. The impending restart of student loan repayments poses another potential setback for millennials aspiring to enter the housing market.

The Impact of High Rates on Market Dynamics

Chen Zhao, lead of Redfin’s economics research, asserts that as long as rates remain high, homeowners will be hesitant to sell, leading to a lack of homes for sale. This shortage will likely maintain high prices due to increased competition for the limited number of available houses. In fact, the median U.S. home sale price rose 3% Y/Y to $420,846 in August, the highest annual increase since mortgage rates exceeded 7% two decades ago. Furthermore, home purchases are being canceled at the highest rate in nearly a year, with close to 60,000 home-purchase agreements across the U.S. being terminated in August.