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Welcome to the Deerwood Realty Show! I'm John Schink, and it’s Friday. I just saw a story that I wanted to share with you all. We’ve talked for a long time about how home prices keep going up, and it turns out, based on this article from the New York Post, that home prices hit a record high in June—the most unaffordable housing market in history.
As an agent, I see a couple of things: first, I see house prices continually going up, even with mortgage rates going down. But now, as we near the end of August, with this statistic coming from June, I'm also noticing some price decreases and a bit of market softening—not a lot, but some. I wanted to dive into this article, so let’s get to it.
The article states that home prices hit a new record in June amid an ongoing housing shortage, even as high mortgage rates continue to push affordability out of reach for millions of Americans. Now, I don't believe it’s just a shortage, and I'll explain why a bit later.
On a monthly basis, prices climbed 2% according to the index. The upward pressure on home prices is making this the most unaffordable market in history, said Lisa Sturtevant, the Bright MLS Chief Economist. She noted that first-time and moderate-income homebuyers, in particular, are increasingly being left out of the housing market. Prices rose in all 20 major metro markets tracked by the index. The Case-Shiller index reports with a two-month delay, meaning it may not capture the latest developments in the market.
That’s what I would say, especially if you’re in St. Louis right now. Will the nicest houses still get multiple offers? Yes. Will you still have to go above asking? Probably. But for the vast majority of the country, I think things are going down, and I think even in St. Louis, there are some things that are going down. On Mondays, I see more price cuts than I have in a couple of years.
The article goes on to say that mortgage rates have fallen since June, but even the decline in rates hasn’t been enough to bring buyers back to the market. Some buyers are waiting for home prices—not just interest rates—to come down, and that’s key.
There are a number of forces driving the affordability crisis, and the article lists them. One is years of underbuilding, which has fueled a shortage of homes in the country, a problem that was later exacerbated by the rapid rise in mortgage rates and expensive construction materials.
I think there are plenty of houses; it's a use issue. If you're using a house for short-term rentals instead of owner occupancy, that does take up quite a bit of supply. It also makes housing more expensive because you can make the numbers pencil out on a short-term rental way easier than if you were just an owner-occupant.
The article also mentions higher mortgage rates over the past three years creating a "golden handcuff" effect in the housing market. Yes and no. House prices accelerated with the mortgage rate increase, and that’s the issue. Even if you drop the mortgage rate to 3% now, people who bought in the last couple of years still wouldn’t move because they bought a similar house for a lower price in the past. So why would they move again? It doesn’t make any sense.
The article continues, saying that sellers who locked in a record-low mortgage rate of 3% or less during the pandemic have been reluctant to sell, limiting supply further and leaving few options for eager would-be buyers. But one thing I don’t think they take into account is how beat up a normal buyer would be. Can you imagine writing offer after offer, weekend after weekend, and not getting a house? After a while, you just get sick of it and say, “No, I think I’ll just wait.”
Right now in the market, it’s an issue of house prices being way too expensive, and it has nothing to do with mortgage rates—that's what I think based on what I see.
I had some questions that I wanted to go over with you, and we'll do that here. Let’s switch over to them.
What do you think are the most significant factors contributing to the current affordability crisis in the housing market? I think the short-term rental revolution has made single-family home ownership a disaster. There were several factors that happened all at once, causing an even bigger disaster. I think there was a demographic shift, there was the flu pandemic that made people reexamine the importance of their life and what their home meant to them, and there was an amazing drop in interest rates that fueled a fire already starting with houses being unaffordable in the first place. Those are the main contributors, in my opinion.
How might the golden handcuff effect impact the housing market in the long term? Well, I think you're seeing it. If you bought a house in the last four years, you're probably not moving—maybe not ever. It really doesn't matter if rates go down because you're not able to move somewhere else. What could change this? Assumable mortgages, in theory, could change this. There are businesses now trying to capitalize on assumable mortgages. I don’t have a problem with that—if someone was crazy enough to give out a 30-year mortgage at a rate that hadn’t been seen in a long time, there’s nothing wrong with companies coming in and capitalizing on that. We might see an expansion of that over time.
But people still move, people still die, people still get married, people still have kids. It’s not like the need for housing goes away. People still graduate from college, get new jobs—these life events make it necessary to buy a house. Will people put off buying a house for a year? Yes. Two years? Maybe. Five years? Probably weren’t a big buyer in the first place. That’s what I think will happen in the long term.
What strategies could potential homebuyers use to navigate this challenging market? Well, right now in St. Louis, I think you make a straight-up offer, and if you get the house, great; if not, move on. The people that don’t end up buying houses are the ones that don’t write enough offers, to be honest. Is there an option for assumable mortgages? Do you have a lot of cash on hand and good credit? Maybe you’re renting—an assumable mortgage would make sense under certain circumstances for sure.
How do you think the housing shortage will evolve in the next few years, and what impact will it have on home prices? Well, you’re not going to build new houses tomorrow. I’m not so certain it’s a housing shortage—I still think it’s a use issue. In some booming areas like Florida, they are seeing lower prices. I realize that the report I read was from June, but now it’s August, and we’re heading into the slower part of the year, usually around November. Things tend to fall off then, so I don't know if that's a big issue. As far as building homes, there are maybe four major home builders in the United States. Maybe that’s not a good thing. Maybe that’s causing some issues. Maybe there are zoning issues, maybe “Not In My Backyard” comes into play. Perhaps there’s a perverse incentive that says we don’t want house prices to go down, especially if we own a house.
What role do you believe government policies could play in alleviating the housing affordability crisis? Well, here’s what I think the government could do. I don’t think giving out grants to first-time homebuyers for significant amounts of money is a great way to fix an already bad problem. I do think they could greenlight zoning regulations a lot faster, environmental regulations a lot faster. And at some point in time—I don’t know if it’ll happen in my lifetime—but when someone buys a piece of property, it’s their property, and they should be able to do what they want with it. The idea that a concerned group of citizens can come in with incentives to stop new housing developments in an area and dictate the entire development is, in my opinion, not great and doesn’t serve anybody.
How might the current affordability issues affect future trends in home ownership, particularly among younger generations? I get worried about this because there’s something called household formation, which is the bedrock of single-family home ownership. If people decide it’s too expensive to start a family or be in a family unit, it’s possible that you won’t get the family formation needed for the single-family market. Do costs influence behavior? Definitely. “Friends” was a fascinating show because they were 30-somethings renting a New York apartment. If you were in the Midwest at that time and not in a major city like Chicago, you looked at being roommates with disdain. What’s wrong with you? Why aren’t you married or with someone? Not saying that’s right, just that there was a stigma. As we go on, are more people becoming roommates? I think so. I think it’s a real issue among younger generations. Plus, they’re kind of on the Instagram thing where they see massive, beautiful homes all the time, so they just expect more. A post-World War II starter home isn’t something younger generations will think of as enjoyable, pleasant, or desirable.
In what ways could changes in mortgage rates influence buyer behavior in this highly unaffordable market? What did they do the last time? When mortgage rates were very low, it caused a buying boom that has now led to our current situation. Rates are now in the low sixes, but buyers haven’t come back out in droves. What number will it take for them to do so? I don’t think it’s about the mortgage rate; it’s a house price issue.
What are some of the potential risks and
benefits of waiting for home prices to decrease before entering the market? This is a fascinating question. If you bought a house three years ago, you're up over 50% in equity and you’ve done nothing to the house. Many economists who are housing shills will say, “We have record equity in housing, so the market is strong. We won’t see any defaults or problems because there’s so much equity to tap into.” My concern is that once you can’t pay your bills due to inflation, now all of a sudden you need to refinance your house at a higher rate—that’s no good. Now you need to start using a credit card to pay your bills, and all that record home equity is gone, forcing you to sell your house. What happens then? You have nothing, and you can't buy anything for the same value, but you need to move. So, you lower the price of your house. Is it a crash? No, it’s not a crash—it just means you have to be willing to stay in a house for a decent period if you expect some sort of return. It’s no different than the stock market. If you buy an index fund, it really does matter when you bought the fund and how much you contribute over time.
That’s what I would say are the potential risks of waiting for home prices to decrease before entering the market. Look, if you're getting married, having children, or doing something where you feel like you need to move, then move. That’s the best thing you can do—just get it over with. Timing the market is a bit of luck. I'm not saying “buy, buy, buy,” but I'm just saying there is a time when it makes sense to buy, and a time when it makes sense to sell.
With that, I’m going to head on out. Thank you for watching, thank you for listening, and I'll catch you on the next one. Bye.