Upswing in construction is unable to meet demand for homes
Those locked-in rates from the pandemic times are having an impact on housing supply shortfalls. Making matters worse is that home affordability continues to erode.
The upshot: For all the positive prognostications for the housing market in 2024 – particularly an expected drop in mortgage rates by mid-year – there are still significant obstacles to overcome before market normalization takes effect.
“The demand is there,” Michael Fratantoni (pictured right), chief economist at the Mortgage Bankers Association (MBA), said during a recent discussion staged by Snapdocs. “But that’s really not the question, regardless of where we are with rates. Really, it’s been a question of supply.”
It goes back to historically low rates
The issue is largely rooted in homeowners who secured mortgages at historically low rates between 2% and 3% during the peak of the COVID-19 pandemic – rates we may never see again.
“The locked-in effect of current owners being less willing to list their properties because they don’t want to give up that low mortgage interest rate is real; it’s having an impact,” Fratantoni explained.
How big of an impact? Fratantoni broke it down in terms of housing availability. “You look at months of supply. You’re looking at 3.5 – that’s about as low as it gets,” he said. “Just over a million homes for sale nationwide, where typically you’d expect closer to 2.5 to three million. So, a very, very tight existing home market.”
Aware of the shortage, builders have begun to pick up the pace of constructing new homes. But the pace of new construction is still unable to keep up with demand, Fratantoni said.
“Builders have jumped into the breach and have picked up the pact of construction,” the economist said. “We’re in a world where about a third of the homes on the market are new construction. We talked about the demand side – a lot of that demand is coming from millennial first-time buyers. On the supply side, it’s coming from new homes as opposed to existing homes. And with new homes, a lot of it is coming from some of the large builders because some of the smaller builders have a little more challenge getting access to financing.”
The trend began in earnest during 2022: “Home prices were still going up and mortgage rates more than doubled,” the economist said. “We started 2022 at a 3% rate and ended up close to a 7% rate. As that ratio of payment to earnings goes up – it’s much less affordable.”
Renting has been no picnic either
In terms of cost savings, choosing to rent hasn’t been much of an option: “For much of the pandemic period, rents were going up extremely too,” Fratantoni said. “So this huge demand for housing meeting a structurally undersupplied market of both rents and home prices going up.”
And that’s not even taking into account other rising expenses, he added: “Property taxes are going up, homeowner insurance going up, flood insurance going up. It’s not just the interest rate and home price effect. It’s also those other costs of owning a home that are impacting borrowers.”
For Candace McNaught (pictured left), senior vice president of Supreme Lending, the current scenario could lend itself to something of a refi boom.
“I think that’s going to lead to some refinancing opportunities down the road, or it could force people to move,” she said. “While it’s unfortunate, it’s just kind of where we are in today’s environment. Fortunately, we’ve got equity, and I think that’s going to be a leading driver.”
Surging home values have led to homeowners sitting on some $30 trillion worth of home equity, according to the St. Louis Federal Reserve. That comes out to about $200,000 cash per homeowner in terms of equity that can be tapped.
Making matters worse, costs to originate per loan have also risen. But the good news is that gross production expenses have dropped 57% peak (Q4 20) to trough (Q1 23).
“Unfortunately for lenders, it was just really a continuation of some of the challenges they’ve had in their businesses going back more than a decade now,” Fratantoni said. “A fully loaded cost to originate – so sales, fulfillment, support and corporate costs expressed on a dollar-per-loan basis --- was about $4,000 back in 2008; we saw a high of $13,000 at the beginning of 2023.”
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