Due to high interest rates, existing home owners ‘maintain’, purchases and sales simultaneously contract, and long-term stagnation.
Regarding the strange phenomenon of a reverse rise in U.S. housing prices due to high interest rates, existing homeowners chose to maintain high interest rates, predicting a long-term stagnation in the strange and ugly housing market where there is a shortage of supply due to lack of demand for home sales and no desire to purchase.
Experts in the U.S. have diagnosed the cause of the ‘strange and ugly housing market’, in which home prices have risen beyond expectations of a decline due to continued high interest rates for a considerable period of time, as the cause of existing homeowners giving up on selling their homes.
The New York Times said that the cause of the skyrocketing housing prices in the U.S. was “a sharply divided market,” adding, “Most homeowners who deposited at low interest rates before 2022 saw their home values soar, but were insulated from the market from higher borrowing costs after the switch to high interest rates. “Those waiting to own a home are now increasingly having to choose between unaffordable rent and unaffordable housing prices,” he said on the 23rd.
Regarding the housing market, most economists expected that as interest rates began to rise, borrowing costs would increase, purchase and construction costs would increase, and housing prices would decline due to a decrease in demand and construction, but this was completely wrong.
With high interest rates, housing prices rose again, and although high interest rates made it difficult to purchase homes, Americans still had a high demand for home purchases, resulting in the creation of a very unfamiliar housing market that was different from the one described in economics textbooks.
When economists and real estate and housing industry experts pieced together a series of data on various pieces of the puzzle, five characteristics emerged.
First, it has become difficult for homebuyers to find a place to live.
The reason is that sales of existing single-family homes have declined sharply.
A sharp rise in interest rates has reduced demand for housing, making borrowing more expensive and leading to a large decline in supply.
Many homeowners held on to their homes longer than they would have otherwise, because selling their homes after high interest rates meant giving up ultra-low interest rates meant homebuyers were unable to purchase the homes they wanted.
The alternative supply and demand situation is delicate. Rents have eased in some cities as homeowners in some areas face soaring insurance costs.
Builders are looking for ways to make new homes affordable for first-time buyers, but this is far from realistic for the housing market.
In the case of Korea, small construction companies entering this market were unable to overcome the entry barrier due to a series of bankruptcies and rapid increases in raw materials.
Second, the rent has risen to the point where we cannot even afford it.
Rent changes compared to a year ago In the U.S., rents have soared in many parts of the country as people flee cities in search of space during the coronavirus pandemic, and rents have continued to rise as a strong labor market and rising wages boost demand.
Rising rents have sparked an apartment construction boom, which has flooded the market with supply, especially in Southern cities such as Austin and Atlanta, which has only slightly slowed the pace of rent growth and, only in some areas, led to temporary declines in already high rents. appear.
These rent adjustments are occurring slowly across markets.
Many tenants are paying negotiated rents early in the high housing price cycle, and new construction is concentrated in luxury markets.
The rental effect caused by the supply of new housing did not help middle- or low-income tenants much in the short term, and as a result, all of this led to a rent burden crisis, and this chain reaction continues to worsen.
Harvard's Joint Center for Housing Studies recently found that a record proportion of renters are spending more than 30% of their income on housing, with more than 12 million households spending more than half of their income on rent.
The Harvard report found that rent is no longer just a problem for the poor, and is becoming a burden even among many middle-class households earning more than $75,000 a year.
Third, the ‘new housing market shift’ was delayed, and although new single-family homes were completed, they were not yet sold, so the housing market shifted to a high price system.
Over the past two years, the housing market has been largely stagnant, especially for existing homes, with buyers unable to purchase homes unless prices or interest rates fall, according to Census Bureau data.
Homeowners feel little pressure to sell and have no desire to become buyers.
What can break the log jam that has become a barrier?
One possibility is that lower interest rates could bring both buyers and sellers back into the market, but with inflation proving stubborn, a rate cut doesn't seem imminent, making that possibility unlikely.
Another possibility is that the market returns to normal as owners decide they can no longer put off long-delayed moves and become more willing to walk away from deals, and buyers gradually become accustomed to higher interest rates as they become more resigned to them.
There may be some signs of this starting to appear.
More owners are now putting their homes on the market, and more are lowering their prices to attract buyers.
Builders are completing more new homes without buyers lining up.
Real estate agents are sharing anecdotes about empty open houses and homes that sit on the market longer than expected.
But few people expect prices to plummet.
Millennials are at the center of the home buying season, meaning demand for homes should be strong, but there is still a shortage of homes due to years of construction shortfalls.
On the other hand, most homeowners have enough equity and are not interested in a quick sale, and home lending standards are strict, so it is certain that there will not be a wave of forced sales like when the housing bubble burst nearly 20 years ago.
Unfortunately, this housing market impasse means the affordability crisis is unlikely to be resolved any time soon.
Future low interest rates will help, but it will take more time for many young Americans to feel they can own a home, the NYT said.
The Ugly and Weird Housing Market Is Third: Income Needed to Buy a Median Value Home vs. The imbalance in ‘median household income’ has made housing unaffordable.
“The average household purchasing a median home that has fallen 10% can expect to spend more than 40% of their income on housing, well above the 30% recommended by financial experts,” Zillow data said.
“For first-time homebuyers, purchasing a home is more out of reach than it has been in decades, perhaps ever,” says How Economists Measure Housing Affordability.
The S&P CoreLogic Case-Shiller Price Index shows that home prices were already high, and the surge during the pandemic has caused homes to rise more than 40% nationwide from late 2019 to mid-2021.
Since then, interest rates have risen more slowly, and the reduction in home prices that many economists expected when the Federal Reserve began raising rates did not fall as much as expected.
Due to rising interest rates, these prices are now unaffordable for many buyers.
A person buying a $300,000 home with a 10% down payment was estimated to pay about $1,100 per month on a mortgage at the end of 2021, when the interest rate on a 30-year fixed-rate loan was about 3%.
At current interest rates of about 7 percent, that home would cost about $1,800 per month, an increase of about 60 percent in monthly costs. This figure does not take into account higher insurance premiums or other costs.
The NYT, which compiled survey results from the U.S. Census Bureau and the National Association of Realtors, said, “The most surprising change in the U.S. housing market over the past two years is the resilience of new home sales,” and “existing homes Because there were so few, many buyers were turning to new construction, while at the same time many large builders were still able to borrow at low interest rates and use that financial firepower to 'buy' rates for their customers, without having to cut prices. “We were able to make houses more affordable,” he said, calling it a ‘short-term measure.’
Housing developers typically struggle when interest rates rise, as high borrowing costs drive buyers away while also driving up construction costs.
Regarding the new home boom that allowed for temporary reductions, “even as existing home sales plummeted, new home sales remained relatively stable, and developers were especially keen to attract first-time buyers by building smaller homes, a segment of the market that had been largely ignored for years. “We have tried to create a new market to satisfy this trend, but it is unclear how long this trend can continue,” the NYT diagnosed.
Many builders halted construction when interest rates first rose, which resulted in fewer new homes coming to the market in the coming years.
Now, if interest rates stay high, it will be harder for builders to offer the financial incentives they used to attract first-time buyers, and the “tiny home market” will disappear.
The U.S. Department of Commerce announced on the 20th, “Private developers started construction of new homes in May at the slowest pace in nearly four years,” predicting a slowdown in the new housing market.
The Ministry of Land, Infrastructure and Transport announced on the 25th that the construction contract amount in the first quarter was 63.1 trillion won, a 7.9% decrease from the first quarter of last year (68.4 trillion won), and that in the private sector was 41.7 trillion won, a 15.0% decrease.
In the first quarter, construction contracts in the metropolitan area amounted to KRW 29.5 trillion, a 6.8% increase, while those outside the metropolitan area decreased by 17.8% to KRW 33.5 trillion.