Quiver Quantitative - The U.S. housing market faces a deepening affordability crisis as the Federal Reserve's aggressive tightening policies drive mortgage rates to their highest in nearly 25 years. This tightening has had the unintended consequence of exacerbating the housing supply shortage due to the "lock-in effect," where homeowners are disinclined to trade their low-rate mortgages for higher-cost loans. Consequently, despite strong economic underpinnings, the housing market has become the least affordable since the 1980s, with market dynamics pinching both ends of the spectrum—those with low-rate loans unwilling to sell and potential buyers finding current rates prohibitively expensive.
Redfin (RDFN) CEO Glenn Kelman’s commentary captures the sentiment that the market's problems are profound and will strain the younger generation's ability to purchase homes. This sentiment is echoed in the story of government employees Neil Wagner and Kelsey Drotning, who, faced with rising interest rates, found their dream of homeownership slipping away. The lock-in effect, identified in the 1980s by economist John Quigley, is resurfacing as a significant barrier, causing shifts in housing market dynamics and impinging on the potential for family expansion, downsizing for aging populations, and labor market efficiency.
The real estate market's response has been varied, with agents like Nancy Hamel and Eugene Quackenbush navigating the "cuckoo" landscape with strategies ranging from seller-subsidized interest rates to adjusting buyer expectations. In contrast, homebuilders such as Lennar (NYSE:LEN) and DR Horton (NYSE:DHI) capitalize on the situation by ramping up production and enticing buyers with price cuts and competitive mortgage rates. However, the industry faces its own challenges, highlighted by a recent jury verdict against the National Association of Realtors, which is now under pressure to address commission structures.
Policy approaches to address the affordability crisis remain a contentious topic, with the Biden administration's current measures potentially exacerbating competition by focusing on buyer support. Economists like Ralph McLaughlin propose alternatives that incentivize selling, which could include tax strategies to stimulate the market. Projections for recovery diverge significantly, with some experts like Lawrence Yun of the National Association of Realtors optimistic about a resurgence in seller activity, while others like Mark Zandi of Moody's anticipate a gradual thaw from the "deep freeze," potentially extending into the latter half of the decade.
This article was originally published on Quiver Quantitative