Renter Nation Says 'Goodbye' To The American Dream!

Will skyrocketing home affordability take away the American Dream For The Working Class?

Real estate is not like the stock market, yet many people who analyze housing act as if they are the same.

When investing in stocks and you fear a market correction, you can sell your stocks and sit on cash. But unless you are ready to accept homelessness, you have to make a different type of choice in real estate.

Choose to be a property owner, taking on the risks and benefits of ownership, or choose to be a tenant, reducing risks and forgoing the potential of the historical returns to your landlord.

We have seen the end of an era for the 30-year fixed rate mortgage, where for fifty years homeowners have enjoyed generally falling rates. In just the past year, we've seen mortgage interest rates grow by more than double.

This has pushed home affordability to a 30-year low and has many people waiting for something that seldom occurs, home prices falling. While they wait, investment banks are entering the single-family homes market, scooping up properties from the historically low inventory of homes for sale, making both home prices and rents rise at well-above historically normal rates.

I believe we are seeing a generational shift in the housing market that will greatly reduce homeownership and push the US towards becoming a renter nation, one in which Wall Street is in control of both home prices and rents. Needless to say, this is not good for the majority of families who need the benefits of homeownership.

Understanding Supply & Demand Today (Versus 2006)

There are a lot of people who share opinions on the US housing market today, but most miss or omit the key driver of home prices.

Understanding The Supply & Demand For Homes Today (Versus 2006)

Too many people who analyze housing suffer from recency bias and await a housing market crash like the one in 2006. But a study of the supply and demand for homes makes it evident that today's market is nothing like the one observed 15 years ago.

The graph above plots the supply and demand for homes in the US. The blue bars measure the number of homes for sale in the US (reported on the left vertical axis), while the red line reports the months of supply of homes for sale on the right vertical axis. The gray dashed line displays the one-year average of the months of supply.

It is commonly considered a balanced market when there are six months of supply. When we see the supply drop below six months, it is deemed a seller's market, as there are more buyers than sellers. The opposite is called a buyers market when the months of supply push above six months.

Today's 2.5 months of supply average is barely above an all-time low, making today's housing market very strongly in the control of home sellers and having home prices moving higher at rates more than double the historical average. Additionally, the 1.2M homes on the market today are roughly 75% fewer than the 4M+ homes that were available in 2006.

So how does today's market compare with 2006? 75% fewer homes and low months of supply of homes (versus 6 months in 2006, which was accelerating rapidly). When people analyze the market, they see homes far less affordable than what has been enjoyed for the past 30 years, so they assume home prices must come down. But supply and demand control home prices and today's historically low supply has caused both home prices and rents to soar, so a collapse in home prices is hard to imagine.

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How The New Construction Premium Has Changed

With the market needing more homes, you might think that homebuilder production will come to save the day. That has not been the case, the US has been deficit building for the past fifteen years, leaving the US short as many as 5 million homes. So why aren't builders delivering more homes?

How The New Construction Premium Has Changed Since 2002

The short answer is that buyers cannot afford what builders can build.

The graph above was created from data pulled from the Tallahassee Board of Realtors MLS, but it mirrors what you will find in most US housing markets. It calculates the "premium" that buyers must spend to purchase a new home versus an existing home. The red line plots the five-year average new home cost (measured in price per square foot of heated and cooled space) while the blue line does the same for existing homes.

In the 1990s and up through 2010, the premium for new construction was typically near 10%. But inflation kept pushing the cost of building new homes higher while the housing bubble and recession brought down the value of existing homes. By 2016, the new construction premium had soared above 50%, and even as the market stabilized and new homes were needed, builders could not compete with the existing homes market.

With inventories tight, existing home values surged higher at alarming rates, and we have seen the premium drop to just above 32%, still far higher than what we had seen in the past. Today's soaring inflation, coupled with supply chain disruptions related to the COVID pandemic, have pushed the cost of building so high that the premium is only slowly falling.

Every year that we produce too few homes only adds to the deficit of available shelter for both buyers and tenants alike, and this has drawn the interest of large investment funds and investment banks who seek the stable cash flows that rental properties provide. They can borrow relatively cheap money and invest it into homes delivering great rental rates plus value appreciation driven by inflation and the lack of available shelter for our growing US population.

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Slow Pace Of New Construction

While there are some reports of high levels of new construction, they are not supported by facts in the overall US housing market.

More than 50 years of new housing units completed by builders

This graph plots the number of new homes completed each month with a blue dot. The blue line shows the one-year average of monthly new homes completed, while the red line plots the 10-year average of monthly new homes completed.

This is one of those times when a picture is worth 10,000 words. The ten-year average monthly homes completed line shows that even with the recent rise in new construction, the US is producing homes at a rate LOWER than what we saw in the 1960s through 2005. The reduced inventory of homes in both the for-sale and the for-rent markets has caused prices and rental rates to soar, and Wall Street has noticed and has taken action.

Imagine a future where only large investment banks can afford to buy homes, happy to lease them to people with great credit who can no longer afford to buy homes. We'll see people forced to pay a higher percentage of their income to have a nice place to live, and the profits from landlording will be shared with a much smaller segment of our population than what has occurred for the past 80 years.

Mortgage Interest Rates Today (Versus 2006)

When we study mortgage interest rates for the past fifty-plus years, we find that a long-term trend appears to have ended.

Mortgage Interest Rates History Graph December 2022

The blue bars in the graph above plot the average monthly 30-year fixed mortgage interest rate since the beginning of 1971. The solid yellow line plots the fifty-year average rate, and you can see that roughly 1/2 of the months were above that line while 1/2 of the months were below the line.

Perhaps the most intriguing trend is plotted as an orange-dashed line showing how since 1980, rates generally declined until hitting a market low in December of 2020. Let me tell you what this means and why we're now facing a multi-generational change in the housing market.

Anybody who purchased a home in the late 1970s or later, all the way through recent years, generally found lower mortgage interest rates when it was time to sell their home and buy another. If they applied their equity from the sale of their home to the subsequent purchase of the next one, the lower rates allowed them to "move up" to a better home while keeping their monthly mortgage obligation pretty close to where their last payment had been.

For more than forty years, move-up buyers have been supported by falling mortgage interest rates, but I fear that those days are over. Interest rates are cyclical, and there is plenty of reason to believe that we're now heading into an era of generally rising mortgage interest rates. Rising mortgage interest rates mean that while move-up buyers will have the equity from the sale of their homes, they might be priced out of buying a nicer home because the cost of the home (and, more importantly, the rising cost of money) will price them out of the move.

Home Equity Has Fueled The US Economy

Another unfortunate outcome of rising mortgage interest rates will be untappable equity for young homeowners. Just as rising rates will squash many move-up buyers, so will homeowners who want to pull equity from their homes. Tenants have never enjoyed the luxury of spending their equity (as they do not create equity for themselves), but now homeowners will sit on a pile of equity, much of it beyond their reach due to the cost of borrowing money.

How much of the US economy has been buoyed by spending from homeowners tapping their equity, I couldn't say, but I cannot imagine things remaining the same when the cost of refinancing becomes greater than a homeowner can afford.

How much of the US economy has been carried by cheap money? That's another question I cannot answer, but again, I cannot imagine things remaining the same when the cost of refinancing becomes greater than a homeowner can afford.

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US Annual Home Sales

With the shock of exploding mortgage interest rates impacting the housing market, we find sales falling as many of the discretionary buyers have left the market.

Graph of new and existing home sales in the US December 2022

This graph plots annual home sales. The blue bars count the number of existing home sales, while the red bars count the number of new home sales.

The significant decline in 2022 is hidden because first-quarter sales were very strong. The decline in sales that commenced with April's rising mortgage interest rates will be far more obvious when we start reporting 2023 home sales.

The number of sales today remains lower than in the bubble formation years, suggesting that fewer buyers were purchasing for flips (investors) than what was observed in 2003-2006. Last year's sales were the most recorded in 15 years, but still fewer than each of the years from 2003 through 2006 when "irrational exuberance" was a term used to describe investment activity in the housing market.

Expect to see fewer buyers in the market next year, unless the big investment banks accelerate their acquisitions in the single-family homes market.

Goodbye To The American Dream?

Homeownership has been a major tenet of the American Dream since the end of World War II, but home affordability declines coupled with the aggressive acquisition of homes by large investment banks could make homeownership too difficult for most American families.

Homeownership has allowed families to build wealth and develop a measure of financial security for over eighty years, but without sweeping changes in how local governments perceive their roles in facilitating "the dream," I have little faith in its future. It will take strong leadership from elected officials and constant reminders to the NIMBY crowd that homeownership is an important element in personal wealth and a major factor in the overall health of the US economy.

When you take away the ability to own and afford a home, you reduce a family's chances of improving its financial wherewithal, and you strengthen the ability of a handful of large funds to control home prices and rents. The US housing market remains one of the last local Mom and Pop industries not yet conquered by Big Business. You can do your part by being a vocal advocate of property rights and smart development in your local community. I hope to hear your voice ring loud and clear, supporting the American Dream!

Will New Construction Bottleneck Cause A New Housing Bubble?
Are you concerned that the bottleneck of builder homes under construction will cause a new housing bubble as they are finally completed?
Google Knows. The Surprising Real Estate Market Forecast You Won't Believe!
Is it possible to forecast home sales in the US housing market with a search on Google? I had this thought about Google and a google housing market forecast as I was reexamining our search engine optimization efforts.
Zillow - Surprising Home Sales Report
Zillow has something to say about the housing market. Zillow's data suggests something else is happening. And it’s not just Zillow.
The Truth About Foreclosures - Mortgage Pipeline Update
The best way to start to analyze the potential for mass foreclosures is to break down the current mortgage pipeline to observe forming trends.
Renter Nation Says Goodbye To The American Dream!
It's the beginning of a generational shift in the housing market that will greatly reduce homeownership and push the US towards becoming a renter nation, one in which Wall Street is in control of both home prices and rents
Biden Rent Control Plan
The White House announced an executive action that Biden says is designed to "protect renters and promote rental affordability," but I cannot imagine a worse response from our Commander In Chief to confront the nation's housing and rental affordability crisis
Market Equilibrium, How The Balance Has Changed In Real Estate
The way we estimate housing market equilibrium has changed, and with it, the way the market is evaluated must change.
What You Don't Know About Home Prices!
Home prices are gaining traction as topics in both the mainstream media and social media, but there are three common misconceptions about the change in house prices that are unanimously reported as unquestionably true.
New Home Construction Report
Kevin Erdmann Housing Update September 2022 - Explains the new home construction pipeline and what to know about the number of homes being built in the US.
Home Prices Are Doing What?
The hype-headlines are scary, exclaiming falling home prices and the coming housing market crash. Here's what the housing market facts reveal:
REDFIN Reports Falling Home Prices?
Does the latest Redfin real estate report show home prices falling? I reviewed the Redfin real estate data, but did I find home prices dropping?
House Prices - Inflation Adjusted Home Prices
Just How High Are Today's House Prices? The price of houses in the US has risen to a toxic level, and many are wondering how they will be able to afford to live in their local communities
USA Today Misleads Readers About Home Prices
USA Today Misleads Readers About Home Prices - Median Home Price: The USA Today Network has been misleading readers, using the median home price change suggesting that houses are getting cheaper and a real estate crash is upon us. Is this poor journalism or is there something more to it?
Economic Outlook For The Housing Market
Joe Manausa gives an update on the economic outlook for Tallahassee and the US housing market. Includes housing market forecast, housing market activity, and new construction analysis, and reveals how Tallahassee compares with the overall US housing market.
Podcast: Housing Myths Dispelled
Home Building Hero David Belman and Joe Manausa discuss many of the "myths" that have been published in the media about the housing market.
Are Wages Keeping Up With Rising Home Prices
Home prices are rising. Mortgage interest rates are rising. Are people earning enough money to buy homes today, or is the home affordability crisis getting worse?
Zillow Exposes Mainstream Media On Home Prices
Zillow serves up the data that exposes the poor reporting of the mainstream media on Zillow home prices and that conditions are not what they seem.
Housing - Do You Follow Your Gut (Or Analytics) In Housing?
I think the signs in the housing market are loud and clear, yet most real estate reports I read or view are missing the most critical factor in housing today.
6 Housing Market Rumors Debunked (1 Confirmed)
7 different housing market rumors are perpetuated as “FACT” in various forms of "hype." Discussion of this "housing market news" has been ongoing for years, so today, I want to put them all to rest.
Is The Supply Of Homes For Sale Finally Rising?
Is The Supply Of Homes For Sale Finally Rising? Is the US housing market heading for a crash? Will home prices fall? Follow the metrics that clearly show what to expect from home prices and the supply of homes for sale in 2022 and beyond.
Who To Blame For Soaring Home Prices
There is a huge shortage of homes in the US, and there is only one culprit to blame, and I’m going to tell you who it is!
When Will Home Prices Fall?
Are Home Values About To Crash AGAIN? Now that we've seen about three years' worth of skyrocketing home prices, prudent buyers with memories are asking when home prices are going to start falling again.
Home Ownership Is Radically Different For Millennials
This is a simple millennial housing case study that will clearly show that the millennials will face a housing market like no other generation going back to post-World War II.
Are We Overbuilding Again?
I've been asked recently for my opinion on the number of homes being built in the US. Specifically, people are wondering if the ghost of 2006 has come back to bring more homes to the market than what can be consumed?
Home Affordability Crisis - Major Housing Market Shift
Home affordability is plummeting, and this home affordability forecast explains why real estate prices are becoming less affordable with each passing month.
Why It's Alway About Supply And Demand In Real Estate
It's all about supply and demand. The real estate supply and demand dynamic tells us everything we need to know to forecast home sales in any given area.
Building Permits Reveal Major Housing Crisis
How do we know there is a major housing crisis brewing? Look no further than building permits! This video examines building permits in detail, as the issue of home affordability is going to become one of the most prominent topics for many years in the national media.
Interesting Employment Dynamic Impacts Home Sales
Home sales in the United States are vibrant, and we can look to the economy as a big reason homes are selling. I have found a pocket of data on the Federal Reserve Economic Data website that explains the vitality of the US housing market.
How Low Mortgage Interest Rates Are Shaping The Real Estate Market
Historic low mortgage interest rates are redefining the housing market and we will see the impact of today's mortgages last long into the future.
How Often Do Home Prices Fall?
Are home prices falling? Will house prices fall soon? Home prices are soaring, buyers are having to pay above most sellers' asking prices, and the housing market feels just like a feeding frenzy during Shark Week on the Discovery Channel.
What Do Low Mortgage Interest Rates Really Mean?
Every article or video about mortgage interest rates conveys that rates are low, but do you really know what it means?
Homeownership Rate Crash #shorts
60 Second Video: Homeownership is going to decline over the next 30 years, as home affordability hits the worst levels seen since the end of World War II. This is a generational shift in the housing market

There are a lot of people who endorse Joe for the job of selling your home, from Barbara Corcoran (Star of ABC's Shark Tank) to Preston Scott (host of Tallahassee's top daily "Audio Magazine," as well as the thousands of happy customers Joe has helped in the past. Listen why!

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