Industry analysts predict what 2024 holds for Illinois' real estate market

Kevin Bessler | The Center Square

January 07, 10:48 AM January 07, 10:48 AM

(The Center Square) – What is in store for the Illinois housing market in 2024 is uncertain, but inventories and interest rates are expected to be a major factor.

One industry analyst says the U.S. is short by 5 million homes. That is one reason many homeowners chose to stay put in 2023, leading to a seller’s market.

According to Illinois Realtors, year-over-year home sales continued to drop at the end of last year as available housing inventory remained tight. In November, there were only 20,568 homes for sale in Illinois, a 22.2% decrease from November 2022.

Analyst Meredith Whitney is predicting that the supply of homes for sale will go up in 2024, driving home prices down. The reason: a wave of baby boomers will look to downsize and put their homes on the market.

“Americans are sitting on a tremendous amount of equity in their homes,” Whitney said. “It’s a question of when they tap into it.”

Jamie Seale with Clever Real Estate agrees and expects prices to slowly decrease this year.

“They have come down a little bit but with the housing shortage, they have come down, but not a lot,” Seale said. “The median home price right now is $431,000, which is a lot.”

That is compared to a median price of about $265,000 in Illinois, but that is 9.5% higher than last year.

Added into the mix for home buyers is the fact that Illinois has among the highest property taxes in the country.

“We are trying to help consumers and their communities grow by advocating for the elimination of all types of burdensome property taxes and the creation of incentives for the construction of high-quality new houses that are affordable,” said Matt Silver, president of Illinois Realtors.

Interest rates continue to drive the market. According to the Federal Housing Finance Agency, 70% of all mortgages are less than 4%, prompting many homeowners to stay where they are.

Based on the Freddie Mac data, the monthly average commitment rate for a 30-year, fixed-rate mortgage was 7.46% in November 2023, down from the previous month of 7.62%.

Existing home sales rise for first time in six months as mortgage rates moderate

Zachary Halaschak

December 20, 10:03 AM December 20, 10:31 AM

Last month, existing home sales increased for the first time since May as mortgage rates began to moderate.

Home sales in November rose 0.8% to a seasonally adjusted annual rate of 3.82 million, the National Association of Realtors reported on Wednesday. Mortgage rates are still pricing out many would-be buyers and leading to people avoiding selling, although with rates recently trending down, more people entered the market last month.

OATH OF OFFICE: DID BIDEN FULFILL HIS PROMISE TO RESTORE THE ECONOMY?

The pace of home sales is still down 7.3% from the year before.

Total housing inventory at the end of November was 1.13 million units, down 1.7% from October but up 0.9% from a year ago.

The median price of an existing home in November was $387,600, an increase of 4% from the year before. Additionally, homes typically remained on the market for 25 days in November, up from 23 days in October.

"The latest weakness in existing home sales still reflects the buyer bidding process in most of October when mortgage rates were at a two-decade high before the actual closings in November," NAR chief economist Lawrence Yun said. "A marked turn can be expected as mortgage rates have plunged in recent weeks."

The Federal Reserve’s quest to vanquish inflation by hiking interest rates has roiled the housing market, as it has translated into dramatically higher mortgage rates.

The Fed’s barrage of rate hikes came after an extended period of interest rates being near zero due to the pandemic. The resulting dynamic saw mortgage rates move from historic lows — spurring an explosive housing market — to the highest level they have been in two decades — slamming into the housing market.

During the pandemic, people were able to buy homes with ultra-low sub-3% mortgages. Now, mortgage rates are 7% and 8% so a lot of those people who purchased homes are now refusing to sell because they don’t want to lose their prime mortgages.

Furthermore, people who might want to buy a home for the first time are waiting until mortgage rates come down before entering the market, resulting in few sales of existing homes.

The increase in new home sales might be, at least in part, a result of mortgage rates falling last month. Given meaningful declines in inflation, it now appears likely that the Fed will pivot and begin cutting its interest rate target in the coming months, with investors expecting the first cut to come as soon as March.

Mortgage rates have fallen since the start of November in anticipation. After peaking at over 8% in October, the average rate on a 30-year, fixed-rate mortgage was 6.64%, according to Mortgage News Daily, which tracks daily changes in rates.

That is a notable decline of more than 1.6 percentage points, a drop that might have been enough to convince some homeowners to put their existing home on the market and some homebuyers to finally pull the trigger and purchase a house.

Also of note to those watching the housing market, there is also a bit of an imbalance between new homes and existing homes. Because so many people are holding on to their pandemic-era home purchases, existing home inventory has been low, driving up demand for new homes.

In fact, new home sales in October were 17.7% higher than the year before.

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To meet demand, construction of housing has continued despite the high mortgage rate environment.

Housing starts, the change in the number of new residential buildings that began construction, rose 14.8% from October to this past month, according to a Tuesday report from the Census Bureau. From November 2022, they increased by 9.3%.

Housing starts rose in November despite high mortgage rates

Zachary Halaschak

December 19, 08:33 AM December 19, 09:11 AM

The number of housing starts jumped in November despite pressure from high mortgage rates, an indication of relatively resilient demand for new construction.

Housing starts, the change in the number of new residential buildings that began construction, rose 14.8% from October to this past month, according to a Tuesday report from the Census Bureau.

WHITE HOUSE PROMOTES 'IMPACTFUL' BIDENOMICS IN END-OF-YEAR MEMO

They are now at a seasonally adjusted annual rate of 1.56 million. From November 2022, they increased by 9.3%.

For permits to build, which are seen as a proxy for future construction, the rate last month was 4.1% above the rate in November last year.

As of Monday, the average rate on a 30-year, fixed-rate mortgage was 7.65%, according to Mortgage News Daily, which tracks daily changes in rates. That is down from a recent peak of above 8% but is still higher than in the years prior to the pandemic.

The housing market was red-hot during much of the pandemic because the Federal Reserve cut interest rates to near-zero levels, causing ultralow mortgage rates for homebuyers. Those historic rates spurred a massive upsurge of demand, causing prices to rise and new construction to skyrocket.

The whiplash from the ultralow pandemic mortgage rates to now has caused ripples throughout the housing sector.

Housing starts peaked in April 2022, when they were the highest they had been since 2006, just before the housing market crashed. Since then, they have gradually trended lower as mortgage rates rose.

Sales of new homes in October were 17.7% higher than in September 2022. Additionally, the median sales price for a new home was $409,300 in October.

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In contrast, existing home sales in October slowed 4.1% to a seasonally adjusted annual rate of 3.79 million, their lowest level in more than a decade.

Mortgage rates can be expected to fall some more next year when the Fed begins cutting interest rates. Investors are pricing in up to six rate cuts next year, a scenario that would be a good one for those looking to purchase a home.

Union bosses or real estate moguls? Tracking the PFT’s finances

Elisabeth Messenger and Andrew Holman | Americans for Fair Treatment, Commonwealth Foundation

December 18, 07:47 AM December 18, 07:47 AM

One reason Philadelphia workers may choose – or feel compelled – to join a union is the promise of access to special funds to cover healthcare expenses. The Philadelphia Federation of Teachers runs one such fund called the Teacher’s Health and Welfare Fund. The structure is fairly straightforward.

First, the union establishes a trust with funding primarily from the employer, which in this case is the Philadelphia School District. Those funds are then distributed to public employees as health and insurance benefits via PFT’s fund. The PFT established their benefit fund in 1971, and their collective bargaining agreement with the school district provides for the district to make annual taxpayer-funded contributions to it.

At their best, these kinds of trusts can be efficient ways for unions to deliver health benefits to workers. But PFT’s Health and Welfare Fund has become a case study in how money meant to help workers can be mismanaged to cover up union bosses’ bad deals, leaving hardworking teachers out in the cold.

Financial documents reveal that between excess cash in the benefit fund and dues collected from its membership, the PFT has spent over $12 million dollars to bail out its failed real estate endeavors.

The Health and Welfare Fund paints a good picture of financial health. According to the latest financial disclosure which covers 2021, the Philadelphia School District deposited $65,133,008 into the fund. In total, the benefit fund brought in $9 million in excess revenue and holds a net financial position of $36 million.

The Health and Welfare Fund’s financial position was so strong that it was able to dole out money – $4.8 million – to an entity known as the 1816 Chestnut Street Corporation (1816). This loan dates back over a decade. Investigative reports revealed that the Health and Welfare Fund loaned this money interest-free and without any terms of repayment. Today, the loan balance is the same, with no payments made and no interest accruing.

What does 1816 have to do with providing health benefits to Philadelphia teachers? As it turns out, not much. 1816 is a nonprofit organization that was created for “holding title of property for the PFT H&W Fund and to collect rents and pay all expenses.” In other words, it is the real estate arm of the PFT Health and Welfare Fund. This might be surprising to anyone who knows PFT already occupies office space at school district headquarters.

And there’s another problem: the holding company doesn’t seem to be holding much. In its latest financial disclosure, 1816 reported selling its only real estate asset. But where did the building go? It seems that 1816 may have sold its only remaining real estate holding to PFT.

In 2021, the PFT itself acquired a building with a book value of $7.6 million, according to the union’s financial records. That same year, 1816 reported $7.6 million in loans receivable from the sale of a building. And while past disclosures show that 1816 had been operating in a negative net financial position since at least 2011, after selling the building in 2021, the organization’s net financial position improved by more than $6 million.

The initial $4.8 million loan to 1816 should have been the first sign of trouble for the PFT’s real estate arm. In 2021, over a decade after that loan was made, the union used $7.6 million in membership dues to buy out 1816’s holdings. In total, the PFT and its affiliated organizations spent $12.4 million to support what now seems like a failed real estate endeavor by 1816.

This $12.4 million was intended to benefit Philadelphia public school teachers. As healthcare costs continued to rise, the $4.8 million from the Health and Welfare Fund could have been saved to offset future healthcare expenses. The $7.6 million in dues could have been used for member training or paying for negotiation costs or any number of other benefits unions are supposed to provide for their members.

Instead, the teachers who paid their dues and signed up for health benefits – and all the Philadelphia taxpayers who fund those benefits – are owed answers from the union bosses turned failed real estate moguls at the PFT. It’s time they come clean about what they did with other people's money.

Elisabeth Messenger is the CEO of Americans for Fair Treatment, a national nonprofit that educates public employees about their rights in a unionized workplace. Andrew Holman is a Policy Analyst with the Commonwealth Foundation.

Gov. Josh Green threatens to bring down 'hammer' on landlords in fallout from Hawaii fire

Gabrielle M. Etzel

December 16, 01:03 PM December 17, 06:45 AM

Gov. Josh Green (D-HI) has threatened to use the "hammer" of emergency orders to convert 3,000 temporary vacation rentals into longer-term housing for survivors displaced by the wildfire that swept across the island of Maui in August.

As of Thursday, Green said that there are still 6,297 residents still living in hotels more than four months after the wildfire killed at least 97 people, the deadliest United States wildfire in over a century.

THE ECONOMIC INDICATOR SCREAMING THAT INFLATION IS NOT VANQUISHED

There are currently a minimum of 12,000 units legally rented on a short-term basis in Maui. Green estimates that there could be nearly as many as 25,000 units available if rentals without legal permits are included in the calculations.

The devastating wildfire entirely wiped out the historic area of Lahaina, destroying roughly 2,200 buildings estimated to be worth more than $5 billion. Approximately 86% of the structures destroyed were residential buildings.

According to Green, a combination of county tax benefits and rent subsidies offered by the Federal Emergency Management Agency should incentivize landlords to comply with the request.

On Monday, FEMA sent letters to short-term rental operators across the island offering to pay them the same rent level that they earned last year for their units. The agency offered to pay for the rent for approximately 2,000 families, while the state of Hawaii and private philanthropists will cover the remaining 1,000 who do not qualify for federal aid.

"So there is no reason at all for people not to take this opportunity provided they want to be a helpful part of the solution," Green said.

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Green intends for the measures to last two years, enough time for more permanent housing solutions to be built on Maui.

Although the governor has not yet released an estimate as to how much the plan will cost for the state of Hawaii, the details are anticipated in a new budget proposal to be released Monday.

Home economics: The alternative to mortgages with sky-high rates

Joseph Lawler

Zachary Halaschak

December 07, 06:00 AM December 17, 06:59 AM

Mortgage rates are at their highest levels in 22 years and house prices are at record highs. Hardworking people cannot get on the property ladder, and retirees are struggling to sell in order to downsize. The Biden administration has done little to help alleviate the problem. This Washington Examiner series, Home Economics, will investigate how we got here, the toll on people around the country, and the alternatives people are embracing to survive the market. The last part of this four-part series focuses on the alternatives to traditional fixed-rate mortgages gaining new consideration among prospective home buyers.

The era of mortgage rates over 7% has increased interest in alternatives to traditional financing.

A 30-year fixed-rate mortgage is not the only way to get into a home. Creative home buyers, sellers, bankers, and real estate agents can come up with a range of other strategies. So far, the market has not seen a major uptake of nontraditional financing arrangements, but that could change if interest rates stay high into next year.

HOME ECONOMICS: IS THE US MISSING 2 MILLION HOUSES — OR 20 MILLION?

“I would absolutely expect those kinds of alternatives to increase,” said Mike Simonsen, president of the real estate analytics firm Altos Research.

Here are some of the alternatives:

ADJUSTABLE-RATE OR OTHER NONTRADITIONAL MORTGAGES

Adjustable-rate mortgages have grown in popularity this year as prospective buyers bet that interest rates can't stay this high forever.

Adjustable-rate mortgages generally come with a set interest rate for a defined period at the beginning of the loan term, which is often lower than rates otherwise. If rates fall generally during that time, the borrower could refinance to the lower rate. Or, if rates fell later toward the end, the rate would adjust downward automatically.

The share of new mortgages that include adjustable rates, either from the beginning or after a period with a “teaser” rate, grew from 3% in 2021 to 11% this year, according to data provided by the National Association of Realtors.

Those shares overstate the popularity of adjustable-rate mortgages, though, because overall mortgage applications have fallen off.

“So it’s not a story about adjustable-rate mortgages increasing, it’s more so a story of fixed-rate mortgage applications declining faster than adjustable-rate mortgages,” said Orphe Divounguy, senior economist at Zillow Home Loans.

In terms of whether taking on an ARM is a good move, Divounguy said it really depends on the homebuyer’s “risk tolerance.” If someone takes on an ARM anticipating that mortgage rates will fall in the future but they end up going higher, it could cause serious financial strain.

“We have no idea where mortgages are heading,” Divounguy said.

It is also worth noting the difference between the rates on a 30-year fixed-rate mortgage and the lower initial rate offered by an ARM. As of Wednesday, the average rate on a 30-year fixed-rate mortgage was 7.07%, while an ARM with a five-year fixed-rate period of the mortgage followed by annual interest rate adjustments was 6.67%, according to Mortgage News Daily.

BUILDER BUYDOWNS

To get buyers into new construction, buyers have been offering “buydowns,” in which they offer to pay lenders a lump sum upfront to lower rates for buyers.

For example, builders might contribute 5%-6% of the home purchase price upfront to lower the 30-year mortgage rate by 1%-2%.

Doing so allows builders to keep sales high without lowering prices too much, keeping volume relatively high in the market for new construction — which has been the bright spot in the market throughout the past year.

“Builders have been using buydowns as an incentive, which has made new construction attractive to borrowers,” said Molly Boesel, principal economist at CoreLogic.

A third of homebuilders reported using buydowns in November, according to the National Association of Homebuilders.

Still, only a small percentage of borrowers buy down their rate, Boesel noted.

SELLER FINANCING

Seller financing, or owner financing, works by having the current homeowner, instead of a bank, act as the lender.

Cutting out the intermediary may help buyers save by getting more favorable terms from an owner motivated to sell, or by lowering closing costs.

It is difficult to get data on the use of seller financing because it occurs between private parties. However, brokers say they have seen a rise in the use of the nontraditional financing method in recent months, and the number of listings mentioning some form of private financing has risen, according to Realtor.com.

ASSUMABLE MORTGAGES

Some mortgages allow buyers to assume the debt, meaning that a buyer can take on the owner’s mortgage rather than taking out a new purchase mortgage of their own.

In other words, the buyer would take on the seller’s debt and pay them any difference between the sale price and the remainder of the mortgage.

Given that most extant mortgages have rates far below market rates, such an option would be attractive to buyers if it is available. Almost two-thirds of all mortgages have rates below 4%, and 90% have rates below 6%, according to Freddie Mac.

Most conventional mortgages are not assumable, but ones backed by the Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture are.

Assumable mortgages are a “hot topic,” according to the Intercontinental Exchange's October mortgage monitor. Still, fewer than a quarter of existing mortgages are assumable, and a major obstacle to buyers assuming sellers’ debt is that many homeowners are reluctant to sell at all because to buy a new home, they’d need to take out a new loan at today’s much higher rates.

CASH

“The share of purchases made without a mortgage, AKA cash sales, is on the rise,” Boesel said.

The share of home purchases without a mortgage rose from 35% in 2021 to 38% this year, she said.

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Partly, that reflects increasing home purchases by investors. The role of hedge funds and private equity firms buying single-family homes has drawn notable scrutiny, including from members of Congress, but Boesel said another factor is that homeowners with lots of equity may be cashing in to make large down payments or using all cash to purchase another home.

It is worth noting that the share of homes owned mortgage-free has also been rising over the past decade, from 34% to nearly 40%, according to Census data analyzed by Bloomberg.

Home economics: Is the US missing 2 million houses — or 20 million?

Joseph Lawler

December 06, 06:00 AM December 17, 07:00 AM

Mortgage rates are at their highest levels in 22 years and house prices are at record highs. Hardworking Americans cannot get on the property ladder, and retirees are struggling to sell in order to downsize. The Biden administration has done little to help alleviate the problem. This Washington Examiner series, Home Economics, will investigate how we got here, the toll on people around the country, and the alternatives people are embracing to survive the market. Part three of this four-part series focuses on the supply side problems in the housing market.

Decades of undersupply led to today’s housing crisis.

Several alternative competing explanations have been offered for why housing has become so unaffordable in recent months, including theories about demand-side factors, such as private equity firms and hedge funds buying up single-family homes or immigrants moving into neighborhoods.

HOME ECONOMICS: THE HUMAN COST OF THE AFFORDABILITY CRISIS

But economists see years — decades, actually — of chronic undersupply as the underlying problem. Any other problems in the market are like speed bumps that cause a momentary slowdown, whereas the constraints on supply are more like an engaged parking brake that is making it harder for the car to get over each successive obstacle.

THE PROBLEM

The problem came to a head this past year as mortgage rates soared even as housing prices have held near record levels or drifted even higher. The upshot has been that payments on newly purchased homes have soared, leading to a steep drop-off in home sales.

Homebuying, for now, has been pushed out of reach of many families.

WHY PRICES ARE SO HIGH 

Housing prices are now as high as they’ve ever been and well above the prices seen in the housing “bubble” years before the financial crisis in 2008.

The basic problem is a lack of supply.

“We have a crisis shortage of inventory of homes to buy,” said Mike Simonsen, president of the real estate analytics firm Altos Research. He noted that roughly 1.5 million new homes are needed yearly to replace old stock and keep up with population growth. Over the past decade, the country has built less than a million a year.

Rents, too, have risen faster than overall inflation for decades and have only accelerated in recent years. That suggests it's not just speculation in real estate as an asset that has driven up prices but rather that the demand for shelter has been outstripping supply.

“Rents provide a much more direct window into the supply and demand dynamic than prices do,” said Kevin Erdmann, a scholar at the Mercatus Center at George Mason University.

The idea that the biggest problems with the housing market are on the supply side has gained currency at the highest levels of government. The last three presidential administrations have all endorsed the argument that local barriers to homebuilding, including zoning laws, building codes, and other land-use regulations, have overly constrained the construction of housing. The use of such rules by homeowners to block new development is often referred to as “NIMBYism,” with NIMBY referring to “not in my backyard.”

The Obama Council of Economic Advisers in 2016 identified local land-use rules as an impediment to affordability and published a “toolkit” for reducing such barriers.

During the Trump administration, Housing and Urban Development Secretary Ben Carson declared himself a “YIMBY” — that is, an advocate of saying “yes in my backyard” to housing. Former President Donald Trump also signed an executive order in 2019 on reducing regulatory barriers to new housing. (He later, though, executed a U-turn on policy and strongly defended existing zoning laws during the 2020 elections, accusing Democrats of a war on the suburbs.)

The Biden White House, too, has blamed poor affordability on a lack of supply and sought to reward localities that ease up on building restrictions.

HOW THIS HAPPENED

Since around 1980, certain major U.S. cities have restricted building so severely that overall prices have seen the effects. The worst culprits are along the coasts, most notably the Bay Area, Los Angeles, Boston, and New York. In recent years, the problem has spread beyond those locations.

Perhaps the best example is San Francisco, a city where the median home sale price is $1,334,000, according to Zillow.

With prices that high, homebuying in the Golden Gate City is far out of reach for the typical household. The guidance from the Department of Housing and Urban Development is that a household should not spend more than 30% of income on housing. But the mortgage payment on the median home in the San Francisco area would take up roughly 85% of the median income in the area, according to the Federal Reserve Bank of Atlanta’s affordability monitor, even though incomes in the city are very high by national standards.

Zillow also places the median rent for all types of housing at $3,378, just slightly above the 30% guideline for affordability for the median household income of just over $126,000 in 2022, as estimated by the U.S. Census Bureau.

What that means is that San Franciscans are strained to afford to stay in the city. And for much of the rest of the country, which had a median income of $74,580 in 2022, housing costs are a prohibitive barrier to moving to the city.

It’s worth noting that many people in San Francisco pay far lower prices because they have rent-controlled units or live in public housing. The median gross rent for all renters is $2,130, according to the Census Bureau, which accounts not just for market-rate housing of the kind that would be counted on real estate sites but also rent-controlled units, public housing, and other forms of affordable housing. The majority of units in the city are rent-controlled. What that means is that people who are lucky enough to have lived in San Francisco for a long time can afford to stay in their apartments, but the city is closed to all but the highest-earning newcomers.

Several local rules prevent new supply from coming online.

Most of San Francisco is zoned for only 14 to 36 units per acre. The city also has neighborhood building restrictions determined by planning code that set height limits, floor-to-area ratio limits, and mandates for off-street parking and yards.

Because almost any project will run afoul of the code, developers inevitably have to petition the planning commission for an exemption. Any plan submitted to the commission undergoes a public process that allows for comments from residents, providing a powerful veto to local neighborhood groups, such as the Telegraph Hill Dwellers and the Haight-Ashbury Neighborhood Council. Even projects that can navigate that process successfully are still subject to veto by the city’s Board of Supervisors.

San Francisco cannot build up — nor can it build out. Many surrounding areas have even more restrictive land use policies. Mountain View, for instance, where many San Francisco residents work at Google’s headquarters, is mostly zoned for single-family or two-family homes. For many years, the city has thwarted the company’s plans to house employees nearby (although it did reach an agreement for a development this year).

Since 2000, the entire San Francisco metropolitan area has only permitted roughly 950 new units a month, on average.

In comparison, the Houston metro has permitted more than 3,000 new units a month on average during that period. Houston, notably, has no zoning law. While San Francisco has some of the tightest land use restrictions in the country, according to an index developed by researchers at the University of Pennsylvania’s Zell/Lurie Real Estate Center, Houston has some of the loosest.

Houston’s population has soared from 4.7 million in 2000 to over 7.3 million.

Metro San Francisco was a similar size in 2000 with 4.1 million people, but the population had only grown to 4.7 million by 2020 before declining during the pandemic to below 4.6 million people.

Houston, a fast-growing energy hub, is an example of a city in which supply is responsive to demand, as opposed to the closed city of San Francisco, where supply is not responsive to demand and thus prices rise. The median home price in Houston is just $260,902, according to Zillow, about a fifth of San Francisco prices. The median rent is just $1,799.

San Francisco builds housing less like Houston and more like the decaying Rust Belt city of Detroit. Even though metro Detroit’s population has declined since 2000, it has issued permits at a rate comparable to San Francisco.

SO HOW MANY HOMES ARE MISSING? 

The Biden White House, in unveiling its housing supply action plan last year, cited an estimate from Moody’s Analytics that the nationwide housing shortage is more than 1.5 million. An updated estimate from Moody’s provided to the Washington Examiner assesses the total shortfall of housing units at 1.8 million.

That’s on the lower end of available estimates. Freddie Mac, for instance, in 2021 put the housing shortfall at 3.8 million units.

Yet even that might be an extremely conservative estimate. The number is more like 20 million, as gauged in a report by the Joint Economic Committee’s Republican staff last year.

The estimates vary so widely because they define the shortage differently, in ways that illuminate the problem facing the county.

The Moody’s figure cited by the White House is estimated by looking at the differences between current and equilibrium vacancy rates for owner and renter housing. It would take roughly 1.2 million new units to bring vacancies back to the rates that prevailed in the 1990s — that is, construction beyond what is required just to keep up with household formation, rebuild from disasters, and meet demand for second homes. An additional 625,000 houses are needed, according to Cristian deRitis, Moody’s deputy chief economist, to satisfy pent-up household formation, mostly young people living with parents or roommates who would prefer to rent or buy their own places if they could.

DeRitis told the Washington Examiner that the 1.8 million estimate is a floor, not a ceiling.

Arriving at the 20 million-unit figure from the Joint Economic Committee takes a dramatically different approach.

The study looks at what housing in closed cities like San Francisco would cost in the absence of restrictive land-use regulations. Kevin Corinth, an economist now at the American Enterprise Institute who was one of the paper’s authors, explained that the estimates are based on research from the economists Ed Glaeser of Harvard and Joseph Gyourko of the University of Pennsylvania, who calculated building costs for the different regions of the country and then compared them with the actual prices of houses, less a fixed amount for the price of land absent regulations. The difference between those two figures, in their reckoning, amounts to a “regulatory tax” of local restrictions that drive up costs.

The authors then used estimates for housing demand to calculate how many homes would be bought if the regulatory tax came down. Summing it all up, they concluded that 20 million houses would be needed to bring housing prices in line with construction costs.

So, which figure is closer to the truth?

It depends in part on what the goal is for eliminating shortages and improving affordability.

If the goal is to get the United States back to pre-2000 levels of vacancies and housing prices, perhaps only 2 million to 5 million additional homes would be needed. A boost to housing supply of that scale would reduce the affordability problem in terms of the number of people paying more than 30% of their income on housing.

But another way of looking at the problem is to ask what housing prices would be in the absence of supply-side constraints introduced by government policies — that is, if the “regulatory tax” were eliminated or reduced.

In that case, with more like 20 million new homes, housing would be far more abundant and cheaper. Not only would fewer people struggle to pay rent or keep up with their mortgage, and not only would household formation increase, but more people would also be able to afford vacation homes, pied-a-terre, and the like. Families along the income spectrum would see their standards of living rise.

Corinth said that having a clear sense of the magnitude of the problem is necessary to pursue the scale of regulatory changes required.

“The only thing that would really address the large scale of the problem is fundamental local zoning reform, actually allowing developers to build much more densely, certainly in urban cores and potentially further out as well,” he said. “It doesn't have to be large apartment buildings everywhere, but it does have to involve substantial rejiggering.”

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Simonsen, though, noted that the laws, regulations, tax codes, and cultural expectations are for encouraging housing as an investment and protecting homeowners. Creating the conditions for the construction of 20 million additional houses would reduce the value of most families’ biggest source of wealth and require something like a cultural revolution.

“If you wanted to create a policy where we wanted to invest in our kids instead of boomers, that would be the policy,” he said.

Home economics: The human cost of the affordability crisis

Zachary Halaschak

December 05, 06:00 AM December 05, 09:58 AM

Soaring mortgage rates have combined with high housing prices to push homebuying out of reach for many people, causing major knock-on effects on their lives.

The one-two punch is causing some people to reconsider buying a home or discouraging them from searching at all. Still, other homebuyers have decided to bite the bullet and purchase a home in this market, but for a property significantly smaller than they could have bought just two years ago.

HUNTER BIDEN USED BUSINESS ACCOUNT TO PAY JOE BIDEN IN 2018: BANK RECORD

John Tyson moved to Philadelphia over the summer and is looking to put down roots in the area, which is where he grew up. He began searching for homes just outside the city but realized after research that the time was not right to buy.

Tyson said he used online mortgage calculators to determine, with mortgage rates around 7.5%, that renting is more attractive than buying. In fact, the advantage of renting versus buying has never been greater.

Tyson told the Washington Examiner that he sees buying a home as a good investment for the long term, but paying $3,000 or $4,000 a month is too much of a stretch for him right now.

For context, Tyson was paying just under $2,000 a month in rent in Denver and was spending more than $2,000 when he was living in New York City after he graduated from college.

“I was looking over it all and everything, and I just kind of realized that now is not the best time to buy, just given the mortgages and everything like that,” Tyson said.

In researching affordability, Tyson stumbled across a major factor propping up house prices: Inventory is low because people who locked in ultralow mortgage rates during the pandemic are holding on to their homes instead of selling in order to keep that bargain deal.

“All of those people are holding back, so it’s kind of inflating the market’s housing prices a little bit,” Tyson said.

During the height of the pandemic, when the housing market became red hot, homebuyers were able to lock in ultralow mortgages of less than 3%.

Because mortgage rates have surged so much, owners of existing homes who have mortgages with rates locked in before 2022 are shying away from selling because they want to keep their historically low rates. Almost two-thirds of all mortgages have rates below 4%, and 90% have rates below 6%, according to Freddie Mac.

With few people willing to give up such favorable borrowing terms, there is less home inventory on the market, making new homes more of a hot commodity.

Sales of new homes in October were 17.7% higher than in September 2022. Additionally, the median sales price for a new home was $409,300 in October.

In contrast, existing home sales in October slowed 4.1% to a seasonally adjusted annual rate of 3.79 million, their lowest level in more than a decade.

But how long Tyson ends up holding off on entering the housing market will depend on several factors — the biggest being when mortgage rates begin to edge lower. Tyson said that, ideally, he would like to see rates fall back to the 5% level, although he would even be open to locking in a 6% rate if the housing prices also fell to a more reasonable level.

Tyson said he is likely looking at waiting at least another year, noting that it will take a while for the Fed to begin reducing its interest rate target and mortgage rates to respond by drifting down.

“A year from now, especially after one year of a lease, then, come that next lease term, I’d probably think about, OK, is it time to buy, kind of reevaluate the market, especially as that lease comes up for renewal,” he explained.

Tyson said he would be saving up money for the purchase in the meantime. He hopes the extra savings from waiting at least a year can help make his purchase stretch even farther when searching for homes.

Tyson, who is 27, also feels a bit like his generation missed out. Contemporaries of his father, who made his first home purchase at 23, don't realize how difficult it is for young people nowadays, he said.

In 2022, the typical age to buy a first home increased to 36, the oldest ever. In 2021, the average age of a first-time homebuyer was 33, according to data from the National Association of Realtors.

It also requires much more income to purchase a home in a budget-safe way. A homebuyer must earn nearly $115,000 to be able to afford a typical home in the United States, according to Redfin. That is up 15% from just a year ago and more than 50% from before the pandemic took hold.

Younger workers still early in their careers are far less likely to earn a salary in that ballpark than those who have been working for several years. For reference, real median household income was $74,580 in 2022, according to the Census Bureau.

More young people are also living at home, another indication of the high costs of owning or even renting a home. A recent Harris Poll for Bloomberg found that about 45% of people aged 18 to 29 live with their families — a share that is similar to the 1940s, when women typically lived at home until they got married.

But the housing affordability crisis isn’t just pushing possible homebuyers out of the market. It is also tough on real estate agents who make their living off home sales.

One real estate agent in the northern Virginia area told the Washington Examiner that she has heard of agents quitting the industry, a bad sign, even considering the historic volatility of the sector.

The real estate agent said that during the pandemic, when mortgage rates were at historic lows, she was seeing anywhere from 10 to 20 offers per home. Now, it's only about three to six offers per property. She also said she has noticed much less traffic at open houses and that private showings are down.

The real estate agent said she has also seen properties being advertised differently. For instance, she has property listed in Alexandria, Virginia, where the seller is in a position to offer seller financing.

“We actually huddled together with the seller and have decided to change some of our marketing strategy, and they are going to offer seller financing,” she said. “But traditionally, when seller financing has been offered, it has been at worse terms than what the market will yield … but in this case, the sellers are actually offering a below-market interest rate to incentivize buyers to come to their home and afford it right out of the gate on a monthly basis.”

Patty Zuzek is a Minnesota-based broker who has been in the real estate industry for 28 years. She said homebuying has greatly decelerated as mortgage rates rise and home prices remain elevated. She said home sales transactions for her company are down to about half of what they were just a year ago.

“We are seeing people hold off — they might be looking, might be looking, oops the rates went up one more time and they’re like, 'I’m out,'” Zuzek told the Washington Examiner during an interview.

The pressures on the industry extend beyond the mortgage market. Zuzek, whose company also builds homes, said the cost of building has also risen, as has the cost of government regulatory compliance fees.

“So it all continues to go up, though when rates go up, it limits the affordability and what people can buy — whether it is existing or not,” she said.

Zuzek said she thinks there is another element involved that is more psychological: fear.

“The younger generation that is purchasing has never seen anything in that 8% [range] because we had such artificial low rates for years and years and years from the foreclosure boom that we were all in,” she said.

Zuzek said possible homebuyers always ask her when mortgage rates might go down. She counsels buyers that owning a home is advantageous for wealth-building and that refinancing is always an option.

Despite all of the headwinds, Zuzek remains optimistic. “Our industry is very cyclical. Housing is very cyclical. I’m very excited to see what the future is going to bring, and I think educating consumers is one of the greatest things we do as realtors,” she said.

But the market hasn’t dissuaded everyone from entering it, and some have left very satisfied they were able to end up in a home they own and are not losing money each month paying for rent.

Samantha Cassin is a recent homebuyer and decided she would enter the housing market this year despite the high mortgage rates. Cassin and her husband married last November and told the Washington Examiner they knew they wanted to purchase their own home regardless of the timing.

Cassin said she and her husband put much thought and discussion into the process. They started the home search in April. The whole process, which she said was at times very tiring, took between seven and eight months.

“We kind of went in knowing we would have to deal with it for a little and knew that we wanted to probably refinance when we were able to,” Cassin explained. “We knew our budget, we knew what we could afford, and we knew what our parameters were.”

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“We really went into it knowing what our limits were,” she added.

Cassin said while the market isn’t the best right now and that she and her husband might have ended up unlucky with the timing, they were eager to start their life together and take the major step of purchasing their first home.

Home economics: High housing costs may haunt Biden on the 2024 campaign trail

Haisten Willis

December 04, 06:00 AM December 17, 07:00 AM

Mortgage rates are at their highest levels in 22 years and house prices are at record highs. Hardworking Americans cannot get on the property ladder, and retirees are struggling to sell in order to downsize. The Biden administration has done little to help alleviate the problem. This Washington Examiner series, Home Economics, will investigate how we got here, the toll on people around the country, and the alternatives people are embracing to survive the market. Part one of this four-part series focuses on the risk the crisis poses to President Joe Biden's reelection effort.

The price of everything is up since 2020, but in absolute terms, nothing has gone up more than mortgages.

With the 2024 presidential contest coming into focus, housing affordability will be among the economic concerns at play, one that hits close to home in the American self-conception as a land of individual opportunity and prosperity.

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GOP front-runner Donald Trump is sounding the alarm about threats to the American dream, penning an opinion piece that says things were better when he was in charge.

"When I was in office, the 30-year mortgage rate reached a record low of 2.65 percent — and the median-income American family could afford a mortgage," Trump wrote in Newsweek. "Yet thanks to Biden's disastrous economy, interest rates have skyrocketed, making home-ownership out of reach for too many Americans, especially young Americans who in previous generations would be looking to start a family."

Mortgage rates remained low in the early months of the Joe Biden presidency, then began accelerating when the Federal Reserve raised interest rates to combat inflation. Mortgage rates have soared from around 3% at the start of last year to around 8% in recent weeks.

Each 1% rise in interest rates represents a payment increase of $5,000 annually on a $500,000 mortgage. Thus, a mortgage at that amount would cost $25,000 more each year now compared to early 2022.

Biden frequently talks up the economy, or "Bidenomics," by pointing out strong GDP growth, low unemployment, strong manufacturing, and falling inflation rates since last summer. He has also focused on lowering consumer prices by battling "junk fees," high gas prices, and especially student loan payments, yet speaks much less frequently on mortgage rates.

Democratic strategist Brad Bannon says that could be a mistake.

"Mortgage rates are part of the bigger problem of inflation, and right now inflation is the biggest obstacle that Joe Biden has to overcome to get reelected," Bannon said. "So yeah, I think he should talk about it more."

The problem particularly affects younger voters, a traditional Democratic base, because they are the subset looking to buy their first homes in order to build wealth and set the stage for raising a family. The sharp climb in rates has made existing homeowners reluctant to sell, which has the effect of keeping prices high for the few homes on the market.

Some of Biden's focus on consumer fees and student loans may reflect his constituency. Republicans are historically much more likely to own homes than Democrats, while Democrats are more likely to hold student debt.

Still, homeownership falling out of reach for younger voters reflects the wider conundrum Biden faces on the economy. His economic approval rating is a dismal 38.4%, according to the RealClearPolitics average, compared to 59% who disapprove. That fact has some Democrats worried the "Bidenomics" push could backfire despite the strong-on-paper economy.

Trump is working to capitalize on the anxiety, saying that historically high numbers of young people are delaying marriage and children in contrast to the thriving late-2010s economy under his watch. But industry insiders have said much the same thing.

"We are seeing people hold off — they might be looking, oops the rates went up one more time, and they’re like, 'I’m out,'” Minneapolis-based real estate broker Patty Zuzek told the Washington Examiner's Zachary Halaschak.

Republicans more generally blame Biden for inflation thanks to big spending, such as the $1.9 trillion American Rescue Plan stimulus bill that passed Congress with no Republican votes in March 2021.

Unfortunately for Biden, the housing market may be one of the last sectors to recover even if inflation returns to the Fed's 2% target. The agency would need to lower interest rates through a series of meetings, and the banking industry would then react to that by lowering mortgage rates.

Higher interest rates also make it harder to build housing, creating a lagging effect on new construction that could remain even in a renewed low interest rate environment.

The issue extends north of the border, where Canadian conservatives are attacking Prime Minister Justin Trudeau over what they describe in Trumpian-sounding terms as "housing hell."

In the U.S., housing affordability was the worst ever in records dating back to 1989, according to the National Association of Realtors.

Yet Biden White House officials have taken only the slightest of steps toward addressing housing affordability in the U.S., such as incentivizing local governments to ease zoning restrictions with grant money from the Department of Housing and Urban Development and the Department of Transportation.

The Biden campaign did not respond to a request for comment from the Washington Examiner.

Biden stresses that he won't pressure the Fed to lower interest rates, though he has used executive powers to try to influence gas prices and student loan payments. In August 2022, Biden implemented a $400 billion student loan forgiveness plan that was later struck down by the Supreme Court, and he has drawn millions of barrels of oil from the Strategic Petroleum Reserve in order to combat high gas prices.

Mortgage rates are still not all that high by historical standards — they peaked at nearly 18% in the early 1980s — though the rate of increase in 2023 is without precedent this century.

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Robert Van Order, Oliver Carr chairman in real estate at George Washington University, said he expects mortgage rates will be a concern in 2024, just not one that tops voter concerns.

"The market seems to think that it's more likely that rates will go down than come up," Van Order said. "Homeowners vote, and people who see high rates or high rates for their kids will react to it. But I don't see it as being in the top five things I'd worry about."

Reasons for hope and despair about the housing market

Tiana Lowe Doescher

December 01, 05:35 AM December 04, 08:14 AM

The U.S. housing market is currently a grim part of the economy.

Mortgage rates are nearing 8. September saw the fewest homes on the market in recorded history. And home sales in mid-October hit a 13-year low.

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But there is room for optimism about the housing market, including a deflating of prices that have killed even some upper-income earners' ability to buy in. And it's coming from the courts, not the markets.

A federal jury in Missouri found on Oct. 31 that the National Association of Realtors and multiple other real estate brokerages violated antitrust laws by conspiring to inflate the broker commission costs for residential home sales. Plaintiffs are asking the association, which represents 1.5 million real estate agents, to pay nearly $1.8 billion in damages.

Their lawyers promise more lawsuits against the real estate industry to come. Meanwhile, the association has indicated that it will appeal the verdict.

The American realty model is an important factor fueling our uniquely expensive market. In the United Kingdom and the Netherlands, real estate agents earn an average commission of less than 3%. Yet the average American real estate agent earns a 5.4% commission, split between the selling agent and the buying agent. Both agents profit from this model not just in terms of the price tag but thanks to the fact that either can pretend that the commission is paid solely by the other half of the equation, rather than the commission being baked into the listing price.

Experts estimate that the ruling against the association could slash the future commissions of Realtors by as much as a third. That's excellent news, obviously. But it's offset, at least somewhat, by some worrying trends in the U.S. housing market.

That's because the real breathing room required to restart the housing market is an increase in supply, not just deregulating downward pressure on demand.

Unlike our northern neighbors in Canada, who widely use some form of an adjustable-rate mortgage, the American norm of fixed-rate loans has turned the property sales cycle into a game of musical chairs. Home buyers race to lock in rates at their nadir and then often are stuck in those current properties while the Fed hikes interest rates to their highest point in 15 years. So, the Fed's recent run of rate hikes has jacked up mortgage rates from less than 3% to about 8%. Not surprisingly, buyers do not want to vacate their homes when trying to purchase a new one is so expensive.

The result? The rental vacancy rate of 6.6% this past quarter is one of the lowest tracked by the Census Bureau in nearly 40 years, and the homeowner vacancy rate of 0.8% is the second lowest ever recorded. (The lowest rate of 0.7% was posted in the second quarter of this year.)

The obvious culprit of this shortage can be explained in the solution. A study by Realtor.com found that the dearth of single-family homes compared to household formation over the last decade grew to an astounding 6.5 million homes. But this gap could shrink to just 2.3 million homes should the nation decide to embrace multifamily home construction.

The culprit is not really, then, the Fed's necessary monetary tightening. Rather, it's local legislation that obliterates the principles of free market capitalism in favor of regulatory capture by a landowning class that wishes to lock unfavorable potential neighbors out of their own communities.

Across the Anglosphere, the housing supply has held stagnant at roughly 400 homes per thousand residents over the past 40 years, whereas the ratio in the rest of Western Europe has risen to 560 dwellings per thousand residents. Over the past 10 years, the ratio in the U.S. has actually fallen. Real housing prices have corresponded to the laws of supply and demand, with nominal housing prices up a staggering 7% in the past year alone.

However, not all localities are created equal. According to a recent deep dive by the Washington Post, seven of the 10 top home-building states voted for then-President Donald Trump in 2020. While seven of the bottom 10 went for President Joe Biden over the one-time Manhattan real estate developer. On a local level, the redder the region, the more pro-growth it is.

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"Even in states that voted for Biden in 2020, the typical Trump-voting county permitted twice as much housing per person as its Biden-voting neighbors and rivals," reporter Andrew Van Dam wrote. "The more remote workers a red county had from 2017 to 2021 — during the pandemic remote-work population shuffle — the more housing it’s currently building. Meanwhile, even blue Zoomtowns beloved by remote workers aren’t building much more housing than less-desirable blue locales."

Reduced interest rates and collusive control of the real estate agent cartel will indeed relax red-hot housing prices. But the real crisis is one of supply. If the demographic transformation of the post-pandemic country is any indication, population growth is a policy choice, and if you allow homebuilders to meet consumer demand, new residents will come.