Prospective homebuyers looking to find a house that doesn’t break their bank account should be hoping mostly for just one thing — More homes.
That’s because the primary driver of sky-high housing prices is a shortage of housing stock. Absent a sharp increase in the number of houses on the market, prices will likely remain elevated indefinitely, even if demand ends up declining.
Experts have pointed to a variety of factors that have contributed to the housing shortage. Chief among them has been the residual effects of the 2008 financial crisis, which reportedly derailed the housing industry significantly enough that there are still significantly fewer houses on the market now than if the recession never occurred.
Also cited as an explanation is a sharp uptick in home buying from the Millennial demographic. As that generation continues to age and more and more of them seek homes rather than rentals, the already-constricted housing stock dwindles even further.
Experts are not expecting the issue to resolve itself any time soon. “In the next three to five years we’re still going to be experiencing tight housing supply,” National Association of Realtors Senior Economist Gay Cororaton recently told Bankrate.
“All in all, we’re short now about 3 million homes,” she said. “That’s a lot of homes to catch up on.”
Authorities at both the national and local levels are taking steps to try and jumpstart housing construction across the country. A recent Senate bill, for instance, would—if passed—spur “the production of deeply affordable housing for families exiting homelessness and for low-income households” by way of the tax code and other statutory measures.
Lower governments, meanwhile, have similarly attempted to use public policy to solve the issue, though sometimes various authorities have butted heads regarding questions of local control and municipal oversight.
In California, for instance, a pair of recent state Senate bills would broaden the circumstances under which multi-family housing can be constructed. Yet the Los Angeles City Council, for one, opposes those measures, with officials claiming the rules would “destroy local control over multi-family and single-family zoning in the state of California.”
The San Francisco City Council earlier this summer took up similar opposition to the measures. Other bills in other states have also been criticized by local authorities, as has been the case recently in North Carolina and Virginia last year, among others.
Zoning laws, of course, are only half the battle. Contractors and homeowners must be willing and able to undertake housing construction in the first place. Yet sky-high material prices and shortages may have delayed untold numbers of homes over roughly the past year with basic building supplies such as lumber seeing major price increases and periodic shortages, both aided in large part by the economic fallout from the COVID-19 crisis.
Those factors appear to have exacerbated recent drops in housing construction, including a drop in housing starts last month as well as a plunge in building permits in June. Any delay in housing construction one month, of course, will likely lead to further shortages—and further price spikes—in the months to come.
Some experts suggest prices may go down a modest amount in the near future. Moody’s Chief Economist Mark Zandi recently argued “house price gains are sure to cool off, a lot,” and that there “may even be some modest price declines in the most hyped-up high-end parts of the housing market, in second and vacation-home locations, and in smaller and midsize cities that have seen the biggest influx of work-from-anywhere households.”
Still, he posited the U.S. will likely not witness “broad-based house price declines” even if prices decline by several metrics.
“That would require a significant increase in mortgage defaults and distressed sales,” he wrote, “which is unlikely given the improving job market and generally tight mortgage underwriting standards since the financial crisis.”