By David M. Greenwald
Executive Editor
I was having coffee this week with someone familiar with and working on development. The situation is bad—inflation is soaring, mortgage rates have increased the fastest in history, supply chain issues mean you have no materials to build with, and those trying to buy into the market cannot find anything to buy anyway.
Atlantic Staff writer Derek Thompson in his weekly newsletter last week called the housing market “cursed.”
He reports that the “number of available homes is still about 40 percent lower than it was before the pandemic.”
It’s even worse if you are a renter. “The average rent has soared to an all-time high, as demand surges in the absence of available units.”
There is a simple story—pandemic, inflation, interest rate hikes. Right? No, he argues, “zoom out and a more accurate picture comes into focus. The 21st century has been a tango between vertiginous swings in demand and corresponding swoons in construction, which has left us with a historically unusual shortage of available 
housing.”
The first problem was the collapse of the housing market in 2007-08.
“After years of undisciplined lending, the U.S. real-estate market collapsed and dragged down financial markets,” Thompson writes. That led to home prices falling for six straight years from 2006 to 2012. “The number of new homes under construction plummeted to a disturbing low as the 2010s became the worst decade on record for home building per capita.”
While the market might have seemed dead, the rise of the Millennial generation, the largest in American history, aged into home-buying years which led to a surge of new demand for housing during a time when supply was lagging.
Thompson argues, “The combination of constricted supply, skyrocketing demand, and bargain-basement rates set the stage for a surge in home prices.”
Housing prices were then peaking, setting new record highs in 2017, 2018 and 2019 and then in the March 2020 pandemic—and the economy was frozen in place.
With the economy grinding to a halt, homebuilders “scarred by the housing crash of 2007, pulled back.”
“Builders remembered what happened in 2007 and 2008 as a near-death experience,” Tracy Alloway, a financial commentator, told Thompson.
In short, no one wanted to overbuild again.
But these expectations proved wrong and, as Thompson put it, “not just a little wrong. Catastrophically wrong.”
The problem: “Rather than implode, the housing market went berserk in the opposite direction. The federal government sent checks to more than 100 million households even as typical families couldn’t or wouldn’t spend their money on leisure experiences—movies, vacations, amusement parks—which left many households richer than they were before COVID.”
One study from the Federal Reserve Bank of San Francisco that found that “remote work was a key driver of the rise in housing prices.”
In short, in 2007, supply outstripped demand and housing prices collapsed. But after 2020, demand outstripped supply and the opposite has happened.
Now we’re in 2022, and the problems of the economy have become more apparent. In order to deal with inflation, the Fed has raised interest rates a number of times.
As Thompson put it: “It’s hard to appreciate just how dramatically mortgage rates have trampolined, but maybe this sentence does the trick: Just 20 months ago, the average fixed rate for a 30-year mortgage was lower than at any time on record; today, it’s higher than in any month this century.”
“You’d be kind of crazy to sell your house right now unless you have to,” Weisenthal said.
As Thompson put it, “It’s not a great buyer’s market, because rates are spiking. And it’s not a great seller’s market, because owners don’t want to double their monthly payments by taking on a new mortgage at a higher rate.”
The people who are getting screwed are first-time home buyers who can’t buy into the market and renters who have no outlet other than renting in an overheated rental market that now has no cooling mechanism.
Worse yet, those who hoped for a market collapse to fix the housing crisis are wrong. What’s going to happen is at some point the economy will come out of it and there will be all this demand for new housing. Worse yet, in the near term, renters are going to see little in the way of new rental housing and rising prices, with nowhere to go and nowhere to turn.
One thing has remained unchanged throughout the entire period covered your opposition to conversion of farmland to housing. Whether macro or micro you never take any responsibility for the impact of the policies you support.
Of course your analysis is superficial and fails to talk about Federal and State housing policy or about how the actions of the Federal Reserve are currently counterproductive at reducing inflation because they restrict additional supply of housing one of the main drivers of inflation as other drivers have cooled.
I’ve been saying this on this blog for a few years now. Builders don’t build (or scale back considerably) when the market drops. That’s why you’ll never see a flood of newly built homes on the market during a downturn beyond what the builders were forced to build. This makes intuitive sense. And I remember my former business partners trying to sell lots to builders that were hammering on our door for lots in 2005 and early 06 but by 07 they stopped buying paper lots. And by 08 they stopped buying lots all together. Yet for some reason there are a few people on this blog that argued this point about builder behavior and housing supply with me.
the actions of the Federal Reserve are currently counterproductive at reducing inflation
The Fed is charged with keeping inflation under control and promoting maximum employment, but it has only one tool: monetary policy. If the legislative branch can’t or won’t use its tools to manage inflation, the Fed has to wield its hammer and raise rates. It’s a blunt instrument, but those of us who remember the 1980s are grateful that the Fed remains above the political fray.
The Fed is using a backward looking indicator on housing causing them to raise rates and probably overshoot on interest rates. This reduces construction of new supply and drives rents higher a counterproductive policy on holding down inflation.
The Fed under Powell isn’t apolitical. Powell held off on raising rates until after his confirmation even though everyone knew that they Fed was behind the curve.
The Fed has a long standing policy of not raising rates at the last meeting before a general election but this FED just did. Any credibility the Fed has for being apolitical has been brought into question by the actions of the current Open Market Committee under Powell.
By comparison with the rhetoric and actions of the Republican Party, the Fed is a model of circumspection. Monetary policy is a dull blade wielded with one eye closed and the other a mere slit, so precision can’t be expected.
I don’t want the country to return to the kind of inflation we had 40 years ago, so I appreciate the value of the rate hikes, despite the pain they bring to all of us (some, no question, more than others.)