A Look at: Housing market trends

Real estate markets go through economic cycles (some short term and some way longer). Some are severe, like the housing market crash of 15 years ago. A dramatic short-term trend is currently grabbing the attention of economists: the doubling of interest rates from a year ago, with mortgage interest rates going up from 3.11% in December 2021 to 6.27% at year end 2022.

The steeply increased rate on a new mortgage makes it unattractive for anyone with an average mortgage rate from the last 10 years to sell their house and “move up” to buy a new house. The interest rate didn’t top 5% until May of this year. For the last four months of 2022, it has been over 6%. The difference from their past rate is likely to cost a homeowner almost $3,600 per year. This shrinks the number of home sale transactions.

But economists point to a huge long-term trend that should buoy the home building market at the same time. That is what is described as a housing shortage that followed the dramatic shrinkage in homes under construction in the wake of the “global financial crisis” from 2006 to 2010.

During that period the graph of new single family homes under construction showed a decline steeper than most any mountain in North America — almost 80% in a little over three years from an annualized rate of 2.3 million homes in January 2006 down to less than 500,000 in April 2009. (All of the housing and interest rate numbers here are courtesy of the Federal Reserve Bank of St. Louis).

The recovery in the number of new single family homes was steady, but nowhere near as steep upward. The necessities to build supply were absent and returned slowly. Lenders left the mortgage business and loan standards tightened. Home builders and their subcontractors moved on to different businesses. So a dramatic shortfall was created and what would be considered a normal number of new homes in the late 1990s were not being built again until the current decade. That has left a big hole, which is being partially filled by multi-family rental construction.

Fannie Mae (or FNMA) estimates the current shortage at 3.8 million units (owned or rental). The National Association of Realtors (NAR) has suggested a range of 2 million to 6 million, but has settled in at 5.5 million.

The NAR has even published shortage estimates by market area. Many of the markets with the most severe shortages are not surprising and are not in the Lake States. New York City, Los Angeles and Miami are listed as “high” shortages. They show shortage indices from 21 to 34.

But there are several smaller Lake States markets that are on the shortage list with lower indices: Minneapolis and Madison both at 7, Grand Rapids at 8, Rochester at 9, Milwaukee and its suburbs at 10, and Detroit at 14.

The NAR shortage calculator is derived by dividing the number of new jobs in a market in the prior year by the number of housing permits issued. They suggest that an index of 2 or over means there is a shortage in that market according to the NAR. You can check our the calculator here: https://www.nar.realtor/research-and-statistics/housing-statistics/housing-shortage-tracker