Chris Avallone, Head of Merchant Banking at Amherst Group, brings his expertise to dissect the tangled web of the housing market. He delves into the "lock-in" effect that's tethering homeowners to low rates and the "lock-out" dilemma faced by aspiring buyers. Chris offers insights on how local governments can tweak zoning laws to unlock the market, and explores stats about overvalued homes. The conversation wraps with predictions on what lies ahead for housing affordability and the need to tackle the ongoing crisis.
The rise in mortgage rates is creating a 'lock-in' effect, discouraging current homeowners from selling and disrupting market liquidity.
Aspiring homebuyers face a 'lock-out' due to increased rates and low inventory, steering them toward the rental market.
Addressing the housing shortage requires innovative local government strategies for zoning and collaboration between public and private sectors.
Deep dives
Mortgage Rate Trends and Implications
The recent rise in the 30-year fixed mortgage rate to around 7% has significantly impacted homeownership affordability. This increase reflects a resilient economy, particularly in employment data, suggesting that previous assumptions by the Federal Reserve regarding interest rates may have been overstated. The higher rates are creating barriers for potential homebuyers, steering many towards rental markets due to a combination of low housing inventory and increased mortgage costs. Consequently, the disparity between the costs of owning and renting is becoming more pronounced, affecting the overall housing market dynamics.
Housing Inventory and Sales Dynamics
Current housing inventory levels are notably low, with existing home sales plummeting to numbers reminiscent of economic crises, such as the pandemic's height. Homeowners, many of whom locked in low mortgage rates, are reluctant to sell and trade into a higher rate mortgage, further constraining market liquidity. This phenomenon is compounded by factors such as changing household demographics and life events that traditionally prompt moves. The resultant situation creates a stalled market where both buyers and sellers are hesitant to engage, leading to an ongoing stalemate.
The Affordable Housing Crisis
A significant shortage of affordable housing, particularly in lower and middle-market segments, continues to challenge the U.S. real estate landscape. High construction costs, zoning restrictions, and an aging housing stock contribute to this issue, leaving families in need without viable options. Solutions such as rehabilitating existing homes can potentially provide relief, as many homes built decades ago remain in prime locations but require updates. However, without targeted incentives or partnerships between public and private sectors, addressing this shortage will remain a formidable challenge.
Investment Strategies in Housing
Investment strategies have shifted to include both buying and building homes for rent, responding to the increasing demand for rental housing. This approach aims to provide affordable housing solutions while also addressing the needs of various demographic groups. Investors assert that by owning less than 2% of the rental housing market, they are not the primary drivers of the housing crisis, but rather are fulfilling a niche demand for those unable to purchase homes. This view highlights a need for a balanced market that can accommodate renters while also supporting aspirations for homeownership.
Long-Term Recovery Outlook for Housing
Experts suggest that achieving equilibrium in the housing market may take a generation, as demographic shifts, such as the aging of the baby boomer population, could lead to increased housing supply. This transition will involve not only the movement of existing homes but also the potential for new builds targeted at bridging the affordability gap. A comprehensive approach that combines new developments, rehabilitation of older properties, and innovative public-private partnerships could catalyze positive change. Nonetheless, the complexity of zoning laws and market frictions may prolong the timeline for a fully normalized housing market.
Chris Avallone, Head of Merchant Banking at Amherst, joins the Inside Economics crew to discuss the housing market. The group examines the "lock-in" effect keeping existing homeowners in their homes and the "lock-out" effect preventing aspiring homebuyers from realizing their dreams. Chris describes a playbook that local governments could use to address zoning and free up the "locked up" housing market. After a quick stats game, Mark polls the group for their forecasts for when and how the housing market will normalize.
The recording of this podcast took place before the results of the 2024 election.
For Cris's paper on the Housing Deficit and Housing Affordability click here
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X' @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
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