I want to connect some dots for you.
Last year, I reported that the US needs 6.8 million more housing units than it currently has just to keep up with replacement levels and population growth. Aka, we are in a massive shortage in the housing market, which has led to the infamous skyrocketing prices and the run on mortgages we experienced throughout the pandemic.
The Fed is jacking up interest rates as fast as it can to try to stop the inflation it created. As a result, the housing market has slightly cooled in 2022. Buyers are frankly waiting for the market recession that seems inevitable so they can scoop up cheaper homes and wait for interest rates to come back down.
But, there’s a fatal flaw in their plan: The housing shortage crisis is about to get a whole lot worse, meaning prices won’t come down and buying a home won’t get easier.
The same factors that created the initial housing shortage are still in play. You can read my detailed account of those here, but in short, the government makes it really hard and expensive to build via terrible policies like zoning, historical overlays, and expensive regulatory and coding approval processes.
Until those things are done away with, we will continue to see a crunch on the supply of housing and therefore more expensive price tags across the board. Such policies slow developers down, and the associated costs get passed onto the consumer in the final price.
But to make matters worse, there’s another factor slowing down developers at the moment: The Federal Reserve. As a result of the interest hike, mortgage demand for new houses is down 41%. The price for new-single family homes in September tumbled 17%. And surveys show as a result homebuilder confidence dropped for the tenth straight month in October.
A lack of homebuilder confidence in the market means they are less likely to construct as many homes as they’ll want to play it safe and ensure they can maintain their profit margins. And, don’t forget, an interest hike also means it’s more expensive and therefore riskier for homebuilders to take out loans on the front end to build in the first place.
Furthermore, trade restrictions and COVID lockdowns have created many shortages in the industries homebuilders rely on to build, most notably in lumber and in the labor market as well.
Do you see the snowball gaining traction now?
All in all, this means the housing shortage will continue to worsen in this country. Only the wealthy will be able to afford the higher interest rates and the spike in mortgages as demand steadily outstrips supply. People living on the margins will have an even harder time meeting their basic needs, and the middle class will increasingly find the American Dream out of reach—like a fragmented, fuzzy remembrance of a happy dream you can’t quite recall.
If you ever wonder why we can’t have nice things, this is it. Government policies attack the free market on numerous fronts. It doesn’t have to be this way. But the only way out is a truly free market with a very limited government.
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