Opinion: These 2 numbers sum up why the housing market will remain tight for years

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Last week I got a letter in the mail.

Like you, I’m surprised this still exists as a practice, but desperate times call for desperate measures:

Courtesy of Ben Carlson


Now I’d like to think our home is just as beautiful, but I don’t think we’re the only ones who have received a letter from this agent. I’m sure there were many houses in multiple neighborhoods that had the same thing.

I showed this letter to my wife and joked that we should charge a premium of 20% on the current value. It’s a big round number, but essentially useless.

Why?

We have to live somewhere!

Even if we could get a much higher selling price, that wouldn’t really help us.

We already have a fixed mortgage rate of 3%. We have a decent amount of equity in the house. And as our desperate real estate agent alluded to in his letter, finding another home to buy right now would be almost impossible.

The combination of rising home prices, low mortgage rates locked in by current homeowners, and low supply makes it unattractive to sell your home and start looking for another now.

Mike Simonson from Altos Research has a chart showing how dire the housing situation is right now:

Altos Research


That’s currently 271,913 homes for sale across the country!

We are in a housing market with record high demand and record low supply. If you want to know why prices are 20% higher than a year ago, this is the simplest explanation.

But there is more to this.

Simonsen was recently on the Odd Lots Podcast with Tracy Alloway and Joe Weisenthal, where he explained how many homeowners are doubling their real estate investments:

It’s like doubling. The homeowner buys the next house, moves up or down. And because mortgages are so cheap, it’s a really good time to keep your first one as a rental unit. And so every year I buy a next one and keep my first one. So this is a big phenomenon. And suddenly I’m a real estate investor. And at the same time, institutional money was cheap. There’s a lot of news about the big private equity funds buying houses, but really it’s the individuals who are doing most of it. So over the last decade, we’ve taken 8 million homes out of the resale cycle and into the investment rental portion of the pool. And that’s, you know, 9% of all single family homes.

I know everyone wants to complain about BlackRock buying all the houses in this country, but 90% of rental homes in the United States are owned by individuals.

And that number is growing due to an abundance of home equity, the strength of consumer balance sheets, and prevailing low mortgage rates.

Low mortgage rates make monthly payments cheaper than ever:

Home equity has skyrocketed due to rising real estate prices:

Also, check out the credit scores of homebuyers these days:

The people who buy houses today have excellent credit ratings. This was not the case during the subprime boom in the early to mid-century, when the majority of buyers were from people with low credit ratings.

Imagine owning your home for five years or more. By now you’ve probably refinanced at least 2-3 times and probably have a borrowing rate of 3% or less. You’re also sitting on nice equity through a combination of principal payments and rising prices.

It certainly doesn’t seem like property prices are going to stop rising any time soon and rents are rising as well, so it makes sense that people would choose to hold on to their original property even after they’ve bought something new. You can easily charge enough rent to cover the mortgage, insurance, and taxes and still get the edge by slowly paying off a cheap mortgage and watching your home appreciate in value.

If I had to guess, it will be years before we see anything approaching a “normal” housing market. We just didn’t build enough homes after the last housing crash to meet the demand of millennials who are reaching their household-starting years.

Things are finally picking up steam, but we have years of underdevelopment to make up for. And it’s not like the supply chain issues, government regulations, and COVID are making it easier to build homes faster.

Meanwhile, rising rates could slow things down a bit if mortgage rates get high enough. Rising home prices and higher lending rates would make it at least less attractive for people to hold on to their old homes and rent them out.

However, rising interest rates would also likely limit housing supply as so many people cling to low interest rates. Why sell to buy a home at a higher price with higher borrowing costs?

Obviously people will still move because of a new job or a new family or a change of scenery or any of the other reasons people decide to sell.

But it will probably be a long time before we see some kind of balance between supply and demand in the housing market.

Also from Ben Carlson: Should I sell my stocks to pay for a house in cash?

Ben Carlson is the author of the investment blog, A Wealth of Common Sense, where it was first published. It is reprinted with permission. Follow him on Twitter @awealthofcs.

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