For the past two and a half years, builders and homeowners across the housing market have battled disruptions in supply, labor and costs. While some would disagree as interest rates rise and the economy slows somewhat, the disruptions may have been a blessing in disguise as the housing market has not been overdeveloped.
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There is little to no speculation as to what may have reflected the impact of the 2008 disaster. Builders and homeowners are human beings, and just like most human beings, when times are very good and there seems to be overwhelming momentum, excessive exuberance can cloud rational thinking. People forget the hard lessons of the past and they believe that the good times will come forever, which never will.
There are fundamental issues that make this 2005-2007 living environment different.
- Since the Great Recession and housing bust of 2007, the United States has started and built on housing. From 2008 to 2021, the country started with an average of 1,026,650 homes per year, well below the national average since 1950, but with a larger population. This led to a housing deficit in the country with low inventories.
- Historically low interest rates near the 3 percent range in recent years have been fueled by a reactive Federal Reserve that has been bucking the housing market. Current interest rates of 5 to 6 percent are close to normal historical levels.
- Tighter bank lending, with more truthful ratings and higher standards to qualify for a loan, pushed out buyers who couldn’t afford a home.
- In 2021, housing starts were 1,601,000, overwhelming a supply chain that had been shrinking to handle demand from 1.0 million to 1.4 million over the past 5 years. Put simply, the supply chain couldn’t keep up.
- In the mid-2000s, the labor force was plentiful, particularly migrant workers. In the last 14 years, the loss of skilled craftsmen in the construction industry has been massive and this labor shortage has prevented construction companies from expanding production.
- After all, there is a significant shortage of affordable housing for sale and rent in the country, and this problem is far from solved.
If you recognize and accept the differences in the markets, here’s what you can probably expect.
There will be a fall in house prices, but barring an increase in foreclosures, which no one really expects, the price cuts will be modest at best. In fact, you’ll likely see fewer price increases and more prices closer to estimated values. Employment remains very strong on better wages, which usually indicates price capitulation will be slower.
Supply chain disruptions continue in many areas of construction supplies, but for the most part, the economic slowdown caused by the Fed’s rising interest rates will dampen pricing in many areas. While the slower volume or excessive exuberance may jar some, the lower prices should ultimately help moderate pricing for projects.
The sting of rising interest rates from 3 to 6 percent will hit newcomers. Restoring interest rates to a normal range for housing will in itself ensure longer-term stability in the housing market.
This requires housing authorities at the local, state, and federal levels to address some of the key cost issues in housing, including increased government building and site fees, and the bureaucracy and regulations that have destroyed the cheapest housing. The obfuscation of these costs through low interest rates will end.
As painful and frustrating as the past few years have been to deal with all of this disruption, it would have been awful if the housing market had become overbuilt with homeowners stuck in unaffordable homes.
Low housing stocks and high demand for housing will keep the housing market strong for many years to come. Maybe this is the start of something more normal. A slowdown in housing production may have been a boon for many builders and homeowners.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc. and he is also the host of the “Around the House” show, which can be seen on AroundtheHouse.TV.