Being in the real estate and mortgage industry, I study this stuff every day and sometimes I catch myself having to slow down and mentally put the pieces together again, so I can’t imagine what it’s like for folks who are not in the industry.  A lot of people want to buy a home right NOW, but when they look into home prices and interest rates they feel they cannot afford it. Let’s take a look at what’s going on – there is certainly a lot of room for hope!

It all comes down to Supply and Demand. Builders simply have not kept up with the demand of our growing population.  With the housing crash in 2008, when builders were stuck with too many homes they could not sell, several builders went Bankrupt – and the survivors struggled mightily to get by.  Ever since, they have been very cautious and afraid to build too many homes too quickly, in fear that a crash could happen again.  

The high-level basics of Supply and Demand:

When Supply is greater than Demand, Prices go down.

When Demand is greater than Supply, Prices go up.

When Supply and Demand are balanced, we have a “normal” market where prices are fair and enough Supply for the Demand.  We will also talk about wage growth shortly.

Right now, housing Demand is not as strong as it has been in recent years because of high interest rates combined with the explosive home price inflation of 2021-2023. I think most people agree that lowering interest rates is the first step in the process of obtaining housing affordability. And interest rates are already coming down. As they come down further, we will have a period of time, starting when interest rates get just low enough, when Demand for homes will sky-rocket, enough to overwhelm Supply.

This is why right now truly is the best time to buy – before prices go up, the savvy homebuyers know that it’s better in the long run to take a little higher interest rate now – and pay the extra interest for just 1 or 2 years – and then refinance into a lower interest rate.  Interest rates are expected to be significantly lower over the next 12-24 months. Over the course of 24 months, that higher interest rate might result in paying $6k-$10k extra in interest; however, if one were to wait 24 months to buy the home, the home would likely be priced $50,000 higher than it is today.  So, the strategy of “waiting for interest rates to come down” is a very costly mistake – by $40k-$45k in this scenario. Right now, Buyers face less competition from other Buyers and Sellers are more willing to negotiate and give concessions to a Buyer. This is a small window of opportunity!

Prices will go up because Demand will be much too high once interest rates get down just enough to open the floodgates of the homebuyers who have been following that strategy of waiting for rates to come down. And personally, I predict that the Demand will be so high that Buyers will face stiff competition when making an offer on a home. In those times, it’s not negotiating for a lower price or any concessions, it’s negotiating to get an offer accepted at the Seller’s List Price!  When more than one Buyer has made an offer, it often results in the Buyers trying to out-bid each other, offering a higher price than the Seller’s list price.  The Buyer who eventually wins the bidding may be paying tens of thousands of dollars over the list price. Again, buying a home NOW is a small window of opportunity!  Wouldn’t it be better to already own the home when all that begins? Those bidding wars will drive up the value of your home and you will enjoy gaining that extra $50k in extra over the next 1 or 2 years.

How do we get past the bidding wars when interest rates are good?

By increasing Supply.

Statistically, nationwide Supply is short by just over 4-million homes to support our nation’s growing population. This means that if we were to hypothetically wake up tomorrow and suddenly have fair interest rates and affordable homes, there would be a shortage of just over 4-million homes to provide the country’s needs.  This is where the builders come in. We need them to increase the supply at a much faster pace than they have been over the last several years. When it is easier and/or cheaper to build homes, and enough Demand is there, more homes will be built. While it may seem like they’re already building homes everywhere in some areas, they’re only building enough to meet the reduced demand we currently have because of the higher interest rates.

Our Household Formation rate is growing much faster than the builders are increasing Supply. So when there is talk about addressing housing affordability in Washington D.C., the builders are hoping for some way to ensure they won’t end up bankrupt if they accelerate their pace. They’re looking for deregulation to simplify the development and construction of housing communities, and for signs that something will be done to drive up demand now, in spite of the fact that rates are still trending downward, but have not gotten all the way there yet; these signs would be things such as tax breaks for first-time homebuyers or some other type of homebuyer incentives.

So how do we fix it?

It is a complex process for us to reach housing affordability:

1) Interest Rates must go down. When they do,

2) Prices will increase due to Demand overwhelming Supply. So,

3) The builders must build millions of more homes nationwide to eventually balance Supply with Demand.

HARD FACT:  Short of another economic collapse like we had in 2008, Home Prices are never going down – at least not in any significant way.

If that’s true, then how can we ever reach affordability?

Wage Growth is critical. And this is measured and tracked to ensure wages are growing sufficiently. Economists, as well as the Federal Reserve, include the Wage Growth statistics in their decision-making that drives our nation’s monetary policy.  Wage Growth must outpace the Inflation of Prices – the Fed likes to see around 4% Wage Growth compared to 2% Inflation, as over time, this will allow our incomes to become more than sufficient for our needs. Overall, right now, wages are increasing at a good pace, we just don’t feel it yet because we were hit with 10% inflation on everything between 2021-2023, so our wages are still needing to catch up to our current prices.

We need lower Interest Rates, more homes Built, and for Wages to continue to grow at a good pace.

Over time, that is how we get where we all want to be.