The U.S. housing market isn’t building enough new homes, experts say. According to Bloomberg Businessweek, a housing market crash isn’t in the cards, but the country is currently in the middle of a major housing shortage.
Many home builders were burned out after the housing market crash of 2008. Smaller homebuilders are still unable to supercharge construction because they rely on borrowing and are cautious about taking big financial risks.
Despite a gradual recovery from the crash, the building rate on single-family houses in the U.S. is still lower than it was during the early 1960s when the U.S. population was 60% smaller. In December 2018, pending home sales were down 9.8%. That’s their lowest rate since December 2013.
But the housing shortage isn’t just because home builders are burned out. NerdWallet cites several reasons for the shortage including baby boomers and landlords having no incentive to sell their property and builders ignoring entry-level buyers.
Typically, older generations would sell their homes once having reached the age of retirement. But because rent prices have also risen like recent housing prices, baby boomers aren’t seeing an incentive to move out anytime soon. Even though roughly 25% of renters do so by choice, rising rent prices aren’t good for anybody.
What’s more, older homeowners are paying lower mortgage rates than newer homeowners. According to the Department of Commerce, the interest rate on outstanding mortgages averaged at 3.8% over the last three years.
Frank Nothaft, the chief economist for CoreLogic, says people are savoring their low mortgage rates and don’t want to give them up. With mortgage rates on the rise, current homeowners are holding onto their houses longer than they would otherwise.
“That means the inventory of homes for sale, which is already very low, is likely to remain that way if we see higher interest rates,” said Nothaft.
The low housing supply has also caused housing prices to gradually climb. And although the price hike has finally slowed down in some areas, the prices remain high.
Compared to the average $274,900 cost of a home built in Texas less than 50 years ago with a slab foundation, the average listing price of a house in San Francisco is $1.61 million. Experts say it would take millennials 20 years to save up for a down payment on such a house.
But rather than wait 20 years, many Americans are choosing instead to invest in houses in smaller towns if only to find cheaper housing options. Young adults already saddled with student loan debt and credit card debt are simply unable to afford a house in cities like San Francisco, Los Angeles, and New York City.
Homeowners need to have room in their wallets outside of their mortgage rates. Only 39% of Americans have enough savings to cover a $1,000 emergency and not just because they spend $1,800 a year on clothes or purchased over 50,000 snowmobiles last year.
Many Americans are living paycheck to paycheck and simply can’t afford a down payment on a house if they can afford to buy a house at all. Those who do want to buy a house are often forced to keep renting, move to lower priced areas, or live with their parents.
“A huge draw for these second-tier cities is that the cost of housing consumes a much smaller chunk of people’s salaries,” said Dora Mekouar from VOA News. “They’re looking for a new or better home, cheaper housing, or to buy a home rather than rent.”