Housing Crisis Deepens as Prices Continue to Rise While New Homes are in Short Supply
Housing prices in the US have now hit record highs as there aren't enough homes to meet the existing demand in the real estate market, making it even more difficult for individuals to afford homes in addition to the high mortgage rates.
Accelerated price growth
According to the US National Home Price Index, home prices increased by 6% in January, per CNN. When prices increased by 5.6% from the previous year in December, this increase happened even faster. Since late 2022, prices have not increased as much as they have now. Brian Luke, who is in charge of commodities, real estate, and digital assets at S&P Dow Jones Indices, mentioned in a statement that for two months in a row now, the prices of houses have gone up in all cities. In San Diego, for example, prices shot up by 11.2%.
He said that house prices have continuously surpassed the highest records set the preceding year despite taking into account seasonal variations. One of the main causes is that there haven't been enough new homes constructed in a long time, which has left millions of dwellings short. The current rise in mortgage rates coupled with growing costs has made it difficult to expand the supply of available homes.
Impact of Federal Reserve's interest rate hikes
The nation’s monetary regulator, the Federal Reserve, repeatedly raised interest rates to curb demand and control inflation. As a result, average mortgage interest rates have risen sharply, rising nearly 8% over the past year. Few people were interested in buying homes due to these high prices and sellers were reluctant to put their homes on the market, exacerbating the housing shortage The average interest rate on a 30-year fixed mortgage for the week ended March 21 was 6.87%, according to Freddie Mac data.
Analysts at PNC Financial Services Group estimate that the rate will remain at 6.5% through the end of the year, indicating that the rate is unlikely to fall significantly this year. According to Ershang Liang, an economist with PNC Financial Services Group, "This means that buying a home could remain challenging this year in terms of affordability," via CNN.
Renting vs. buying
Notably, a new study made public Tuesday (March 26, 2024) found that renting housing could be cheaper than buying in America's biggest cities. According to Realtor.com's February mortgage report, the cost of buying a starter home in the 50 largest US cities was $1,027 more than renting one. The top five areas identified as more affordable for renting than buying are Austin, Texas; Seattle; Phoenix; San Francisco, San Francisco; and Los Angeles.
After accounting for seasonal variations, month-to-month price increases totaled 0.4%. The S&P CoreLogic 20-City Composite index, on the other hand, increased by just 0.1%, which was the least amount of growth since February of the prior year.
Potential price drop and correction phase
Robert Frick, corporate economist at Navy Federal Credit Union, stated that the minor increase from month to month is the significant figure in this instance. "If this pattern persists, prices may begin to drop. Under ideal conditions, though, I'd say it will still be a year or so before we see a national decline in house prices."
The data shows that 17 of the 20 metro areas had price drops from December to January when seasonal adjustments were taken out. According to Liang, cities like Phoenix, Dallas, and Denver, which have been experiencing slower growth in prices or even price declines every month, might be undergoing a correction phase after years of sharp increases in prices.