The Expert Podcast

The real estate market is changing quite a bit as we get to the second half of 2022. Obviously, there's more inventory, the interest rates have gone up, and that big spike in prices has leveled off where people aren't jacking up their prices as much anymore. But more importantly, behind the scenes, you're also seeing a lot of home building really putting on the brakes. According to this article in the Wall Street Journal, housing starts declined 9.6 percent because of inflation and higher mortgage rates, so that's not a big surprise.

If you're a home builder and you see mortgage rates go up, inflation go up, and maybe a recession happening, along with cost of materials rising, you're probably having a flashback to 2007 and 2008. Back then, a lot of home builders went bankrupt, the economy crashed, and it was a disaster. Any home builder currently in the industry is at least aware of 2008. That wasn't that long ago—only about 12 to 14 years ago—and it’s not something people forget about easily. So, you're going to very quickly clam up and stop building a lot of homes.

What's that going to do for the marketplace? Even if you don't need to buy a house, even if you don't need to transition from renting to buying, this slowdown of new home construction is going to have a very serious effect on the future. Already, before we got into this slowdown, there was already a home shortage. There were more people wanting to buy a house than there were houses to buy. That's why you had all those bidding wars, with 20 people lining up to buy a house and home prices spiking through the roof. Those people are still out there wanting to buy a house—they just didn't buy one. There have been a few homes built since then, but not that many. Estimates from various government agencies say that four or five million new homes need to be built just to keep up with the existing market right now—not counting new people coming into the market over the next few years.

If the building industry is cutting back on home building, what does that mean for the future of the market? Sure, right now we may have hit a little bit of a high spike on prices for homes in 2021, where they went up quickly and people are catching their breath. But remember, people still need houses. Everybody needs four walls and a roof to live in. The people who were trying to buy a house in 2020 and 2021 that failed—whether because the prices were too high, a cash buyer came in, or someone outbid them—they still want to buy a house. They are living wherever they were before—maybe they're renting, living with other people, or living in a smaller home and wanting to upgrade. Those people are still out there, and the decline in home building volume is only making the problem worse.

We calculate that by the year 2025, there will be a six to seven million home deficit in the United States from people who need a place to live. There are certainly more apartments being built and rental properties being created, but there are also more people coming into the market every year. It's estimated that 1.2 million people come into the market every year, needing to buy a house. That may seem like a lot, but it's really not. There are over 100 million households in the U.S., so that’s only about one percent. The housing market needs to add one percent per year, which is about 1.2 to 1.3 million, plus the 5 million home backlog that already exists. When you factor in the decline in home building volume by 10 percent, you may be lucky just to keep up with the 1.2 million. You’re probably going to go backwards by about 500,000 houses a year. So, in three years, you may add another million and a half to what's already needed.

This backlog was just starting to see some light at the end of the tunnel, but now that door's closed. Interest rates, inflation, and the rising costs of materials and labor are shutting things down. The housing crisis that may exist in 2025 could be twice as bad as it is now.

So, what does this mean for you? Act accordingly. If you're looking to get into a property and need a place to live, don't think that 2025 will be any better. If you're a builder, maybe find a way to build a house where you can support the end user price. If you're a homeowner and know you want to move up or down, you may want to consider that the inventory might not be good. It might be time to build a house on your own—maybe hire a builder to build a house specifically for you, rather than looking for a spec home. There are a lot of possibilities, but if you look at the numbers—not just opinions or what people on the news say—you’ll see the actual numbers and can plan for your future residence based on those.

Think about where you want to be in four years. Take 2022 and add four years—that brings us to 2026. When you say 2026, it might seem like a long time away, but four years isn’t that long. In fact, take 2022 and subtract four years—that’s the end of 2018. What were you doing then? It wasn’t that long ago. Keep your future needs for housing in mind and align them with the economy and building trends, and you'll be in good shape.