In most parts of the country, it’s a sellers’ market in real estate, as people try to lock in a mortgage before interest rates continue to climb. Realtors also report that a lack of inventory is making the situation worse.
In the latest installment of the Marketplace Morning Report’s Economic Pulse, David Brancaccio went deeper into the inventory situation and the ongoing imbalance between what’s available and the ability to get people into homes. He spoke with Chris Herbert, managing director of the Joint Center for Housing Studies of Harvard University. The following is an edited transcript of their conversation.
David Brancaccio: So it’s not like supply chain shortages this week or this month is causing this inventory issue. This is really an endemic situation that is contributing to inequality.
Chris Herbert: It is, you know, it’s an issue that’s been building for a number of years. We haven’t been building nearly enough homes for most of the last decade coming out of the Great Recession. And so we entered the pandemic with a shortage of homes. And it’s only gotten worse, as you say, because of supply chain issues and the like.
Brancaccio: Yeah. And also, the people who were able to keep their jobs during pandemic, some of them were able to save money. So they had a bit of a stash that would help them make a down payment. And so now, everyone’s trying to buy houses who can but not everyone can, given the prices.
Herbert: Now, not everyone can. You know, as you say the pandemic was a boon for many where we were stuck at our basements, but still had our jobs, we were getting stimulus payments, we got dispensation from our student loans. And so our savings was building up rapidly. But many people lost their jobs and didn’t have the benefit of those other supports. And the other piece of this is that as much as we’re watching home prices, go through the roof and think that that’s a problem. It’s not a problem if you’re a homeowner, and you’re getting the windfall of that rapid rise in prices.
Brancaccio: This endemic problem that predates pandemic; developers like building housing complexes, how come they haven’t been building more? Some of it has to do with concern about growth in some areas.
Herbert: Absolutely. You know, builders certainly want to build homes, particularly when there’s a lot of demand out there. But in order to build a home, you have to first get the right to do that from the local jurisdiction where you’re putting up that housing. And so certainly a big factor has been the hurdles that folks have to go through to build housing. And over the last 10 years, a lot of the housing that’s been in demand has been larger multifamily housing in central locations and cities. And those are tough places to build.
Brancaccio: Within urban areas, right? I mean there’s not as much land and the rules may be tougher zoning, and so forth.
Herbert: Yes, and certainly there’s less land available. The other piece of it is that in order to build a lot of housing, what we’ve done in the past is we’ve gone out to the urban fringe, and that has been an area where there has not been as much building, in part because young millennials prefer to be in the city, in part because a lot of people lost their shirts in the last downturn out there. But if we’re going to build more housing, part of it is also we’ll have to build in the edges of metropolitan areas as well.
Brancaccio: But environmentalists listening would want the jobs to be located near there so these don’t make commute times even worse, and we don’t burn more fossil fuel to get where we need to go.
Herbert: It’s certainly the case that a sprawling metropolitan area is not good for the environment. Although if people are working more from home and having to get less than their car to go to those jobs, it does free up those areas to be able to be places for people to live and work from.
Brancaccio: Let’s address a key paradox right now in this area: Interest rates are designed, the higher interest rates are designed to throw cold water on the exuberance, if not the frenzy, that we’ve been seeing in parts of the housing market. OK, but these high rates will also make it harder, more expensive, for people to buy a house, especially affecting potential first-time homebuyers.
Herbert: Yes, it’s really a difficult time to be a first-time homebuyer. Just over the last year — when you factor in that we’ve seen house prices go up by 20% in many metropolitan areas, and now you add in the fact that interest rates went from being under 3% to over 5% — the increase in the monthly payment on a typical home has gone up by hundreds of dollars and made it unaffordable for literally millions of renters over that span. So the rising interest rates are really going to make it much, much harder for renters on the margin to be able to afford a home.
Brancaccio: What’s your feeling about moves in places like California to make it easier for people who have some property to subdivide it a bit to maybe turn a garage into a small dwelling, given the housing crisis that’s ongoing?
Herbert: We absolutely need to be looking under every stone for places that we can add housing, particularly in places like Los Angeles and other parts of California that are already largely built out. So I think of a city like Los Angeles — which has a disproportionate share of single-family housing, given the size of that metropolitan area — to allow for greater density within that existing urban fabric is really a necessary part of the solution to our housing supply shortage.