Affordability Crisis or Inventory Scarcity: The Battle for the US Housing Market

US Housing Market Battles Affordability Crisis and Inventory Scarcity

The US housing market is facing a fierce clash between opposing forces, with affordability deteriorating due to a sharp increase in mortgage rates and a scarcity of existing inventory. These factors are exerting both downward and upward pressure on home prices, creating a challenging environment for prospective home buyers and sellers.

In 2022, mortgage rates surged from 3% to over 6%, catching many buyers off guard and diminishing their purchasing power. This sudden increase in rates led to a decline in housing affordability, reaching levels unseen since the housing bubble in 2006. As a result, home prices underwent a correction last fall, particularly in overheated markets in the Southwest and West Coast. This affordability crisis has left many potential buyers on the sidelines, leading to a slowdown in home sales.

Simultaneously, the housing market is experiencing a lack of available inventory. Homeowners have been reluctant to sell their properties due to the fear of higher mortgage rates. With historically low interest rates, they see little incentive to relinquish their favorable financing terms. This hesitation has created a bottleneck in the housing supply, with the number of homes listed for sale in June 2023 being 26.2% fewer than the previous year.

The limited inventory has sparked competition among buyers, driving home prices higher in most markets during the first half of the year. The “lock-in effect” is a term used to describe the phenomenon where homeowners are hesitant to sell and buy new properties due to the trade-off of higher mortgage rates. According to Realtor.com, 91% of mortgage borrowers have rates below 5%, making it financially unattractive for them to enter the market at higher rates.

The strain on the housing market extends to real estate professionals who rely on transaction volume to make a living. With the rapid deterioration of affordability and the scarcity of available homes, real estate agents and brokers are facing limited opportunities to facilitate sales and earn commissions. This decline in transaction volumes has posed financial challenges and jeopardized the viability of some businesses.

Experts have differing opinions on the future of the housing market. Firms like Zillow and CoreLogic predict that national house prices have bottomed out and will continue to rise due to the scarcity of inventory. However, Moody’s Analytics chief economist, Mark Zandi, believes that housing affordability will improve over the next few years as mortgage rates slowly decrease and national house prices fall. Zandi expects a gradual decline in prices rather than a sudden drop.

In conclusion, the US housing market is at a crossroads, grappling with an affordability crisis and a lack of available inventory. The clash between these opposing forces is causing uncertainty for prospective buyers, sellers, and real estate professionals. The future direction of home prices is still up for debate, with experts offering differing perspectives on whether affordability or inventory scarcity will have a greater influence. As the market evolves, it will be crucial to monitor the impact of these factors and their implications for the overall housing landscape.