Affordability and low inventory are continuing to create pain points for the housing market. According to newly released data from the National Association of REALTORS (NAR), pending home sales are at their lowest level since the Great Financial Crisis. Existing home sales for August dropped 4.2 percent from a year ago to a seasonally adjusted annual rate of 3.86 million. Although the Fed has kicked off its rate-cutting cycle with a 50-basis-point reduction at its September 18 meeting, high interest rates are still a big hurdle for homebuyers and housing developers.
Urban Land: Given the current backdrop, what’s your view of the affordable housing crisis in the U.S. And, in your opinion, what are the big ripple effects that the market is going to see over the next 12 to 24 months?
John Chang, Senior Vice President, National Director Research Services
Marcus & Millichap Real Estate Investment Services
“Housing affordability in the U.S. has been dramatically impacted by the one-two punch of rising home prices and rising mortgage rates. Central to the issue has been a broad-based housing shortage, with builders unable to keep pace with housing demand. Much of the blame for this challenge lies with policymakers who, throughout much of the country, have failed to enact policies that are conducive to housing construction. Single-family completions are roughly half the levels achieved at the height of the last cycle in 2006, with builders currently delivering about 1 million units per year. The housing affordability challenges have been exacerbated by the interest rate-driven “lock-in effect,” which has reduced housing resale activity.
The recent rate reduction by the Federal Reserve could be the turning point for the housing market. Average 30-year mortgage rates peaked at about 7.75 percent in October 2023, and have since declined modestly, but since the Federal Reserve made its first rate cut on September 18, 2024, the pace of rate reductions has accelerated. Given the strong prospect of future rate reductions, mortgage rates could decline into the upper-4 percent range by the summer of 2025. That would bring additional liquidity to the housing market while dramatically reducing monthly mortgage payments. It could also loosen the lock-in effect that has restrained the resale housing market and boost the pace of housing construction. The key variables will be how much the Federal Reserve reduces rates and how quickly they take action. In addition, lender confidence in the economic outlook and financial market stability will play a role in where they set their mortgage rates. Ultimately, the strong first step rate reduction taken by the Federal Reserve may have been the turning point for the housing market.”
Lawrence Yun, National Association of REALTORS® Chief Economist and Senior Vice President of Research
“Apartment rent gains have calmed close to zero nationwide due to very active multifamily housing starts over the past three years. This attests to how increasing supply can help with affordability and deny populists’ harmful policies such as rent control and eviction moratoriums. As to the ownership market, low mortgage rates will bring additional homebuyers to the market. However, supply is needed to assure better affordability. Some homeowners will list their home from the lessening power of the “locked-in” effect and as the cost of financing new home construction falls. The big impact on affordability will ultimately come from localities increasing housing supply to match local rising populations.”
Dana M. Peterson, Chief Economist, The Conference Board
“The affordable housing crisis is an ongoing and likely persistent problem for the U.S. that stifles growth, inhibits household wealth accumulation, and generates inflation that may keep Fed interest rates elevated compared to pre-pandemic norms. Limited housing affordability reflects decade-high mortgage rates, poor credit ratings often linked to outsized debt (e.g., credit card, student loan), and elevated home prices due to an insufficient supply of homes. Mortgage rates are elevated because the Fed raised monetary policy rates to subdue a surge in inflation during the pandemic-recovery period. The Fed has begun cutting interest rates and is expected to continue lowering them over the course of the next year or so. Lower policy rates should help reduce mortgage rates and loosen up the market for existing home sales.
However, housing will remain unaffordable going forward if potential homebuyers are unable to repair their balance sheets and there is not greater housing supply. The Great Recession, which was caused by a housing bust, discouraged new construction despite mounting demand. Home builders are also challenged by both skilled and unskilled labor shortages and high costs for key building materials. Meanwhile, strict local zoning laws prohibit construction of multifamily and low-income housing, and purchases of existing homes by investors can reduce inventories and bloat prices. Lower mortgage rates, as well as a combination of zoning law reforms, public-private-partnerships to incentivize construction of affordable homes, more construction workers, and financial literacy education and programs that help potential buyers to pay down debt and save, will be necessary to solve the United States’ affordable housing crisis.”
Gleb Nechayev, Head of Research and Chief Economist at Berkshire
“The housing affordability in the U.S. is near its lowest levels since the early 1980s. It was already a major challenge before the pandemic but has become more acute since then. Home prices grew by more than 50 percent over the last five years, twice as fast as household incomes and rents. The key reason behind it is a persistent national shortage of housing, with the current estimates varying from 1 to 3 million units for the entire market to over 7 million units when adjusting for the needs of low/middle-income households. One of the major implications of this imbalance is the continuing upward pressure on housing costs, more broadly, that will likely keep contributing to consumer price inflation beyond the immediate horizon. Any viable long-term solution will likely require a combination of tax incentives and public-private partnerships at the local level to significantly boost housing production and start closing this demand/supply gap. From the market fundamentals standpoint, the case for investing in attainable housing is now as strong as ever.”*
* Berkshire provides investment management services to advisory clients that invest in the multifamily housing sector. In respect of its investment management services, Berkshire may receive performance-based compensation from such advisory clients. Accordingly, Berkshire may financially benefit from the appreciation of multifamily housing units.[BM1]
Brian Bailey, CRE, CCIM, Subject Matter Expert & Senior Policy Advisor, Commercial Real Estate, Federal Reserve Bank of Atlanta
“Housing affordability remains challenged. However, to fully understand the issue it needs to be viewed holistically, which includes adding multifamily. A concerning trend began in 2012 when the percentage of affordably priced multifamily units began to shrink. According to CoStar, in 2012 affordable housing accounted for 24 percent of the overall multifamily units. That share declined to 21 percent by 2024.
Higher rates of housing inflation have created challenges for all income groups, especially lower cohort renters. The additional stress during 2022 to early 2024 resulted in nationwide affordable multifamily housing occupancy rates declining modestly and inflation-adjusted effective rent growth rates stalling. Declining long-term rates could benefit affordable housing by lowering building costs. While lower interest rates benefit households and new construction, there are several issues – like elevated building costs, higher local regulatory zoning and construction requirements, lack of land, etc. – that create headwinds for long-term affordable housing. While lower interest rates will help, there are many additional influences that mitigate the widespread availability of affordable housing.”*
*These are the respondent’s thoughts and not those of the Federal Reserve Bank of Atlanta, or the U.S. Federal Reserve System.
Ryan Severino, CFA, Managing Director, Chief Economist and Head of Research at BGO
“Housing remains chronically and acutely undersupplied in the U.S. A crisis that emerged after the GFC has only intensified over time. This housing shortage has pushed real housing prices up and they still hover near record-high levels. With many households priced out of homeownership, the value-proposition and many positive attributes for renting is becoming more attractive. But excess demand for apartments is also pushing rents up to record highs in many markets. Greater housing development will continue to be part of an important set of solutions to fixing this multi-faceted problem. Thankfully, states, municipalities, and even the federal government are taking this problem more seriously. This shift in effort and urgency toward new housing development, with some areas becoming more favorable, is a big change from the last couple of decades. That won’t fix the problem overnight, but it is an important start.”
