Why the Housing Shortage?

 The Mortgage Corner

How can we recover from our housing shortage that has resulted in record homelessness and a lack of affordability for many young households?

FREDhousingstarts

There haven’t been enough homes built to satisfy prospective home buyers for a decade—from the end of the housing bubble until 2020, thanks to the oversupply generated during housing bubble and Great Recession, as can be seen in the FRED graph of housing construction dating from 2000 (large gray bar is the Great Recession).

Builders are still not building enough homes to keep up with population growth while builder confidence remains stagnant in the face of weaker homebuyer demand. August housing starts declined 8.5% month-over-month to a seasonally adjusted annual rate of 1.307 million units, according to the latest data released by the U.S. Census Bureau.

Builders had been constructing 1.6 to over 2 million new housing units until January 2006 at the height of the housing bubble because they thought they had prospective homebuyers with adequate incomes and credit that could afford the purchases.

But lax regulations and supervision during the GW Bush administration by the U.S. Treasury and Alan Greenspan’s Federal Reserve allowed for anyone to qualify to buy a home with so-called liar loans that had artificially low start rates. The housing bubble burst when Greenspan finally began to raise interest rates to combat the rising inflation, which caused a massive defaulting of the liar loans.

More than one million new households per year are still being formed but it wasn’t until 2013 that more than one million new units were being built again. And 8.7 million jobs were lost during the Great Recession, compounding the problem of affordability.

In a word, builders must build more affordable homes. At one time 40% of existing-home sales were entry-level, first-time homebuyers that could afford to buy a home. It’s just 28% in the latest sales report by the National Association of Realtors (NAR).

Existing-home sales remained essentially the same in August, ticking down by 0.2% from July, according to the National Association of REALTORS® Existing-Home Sales Report. Existing-home sales are also hurting because of the lack of affordable financing with the 30-year fixed rate mortgage still above 6%.

"Record-high housing wealth and a record-high stock market will help current homeowners trade up and benefit the upper end of the market. However, sales of affordable homes are constrained by the lack of inventory," Yun added. "The Midwest was the best-performing region last month, primarily due to relatively affordable market conditions. The median home price in the Midwest is 22 percent below the national median price."

We got to the housing shortage largely because of bad politics and a record income inequality for working Americans that must be reversed. The best programs that subsidize building for more affordability include zoning for more units in areas near transportation centers, a state and local government mandate, and more funding set aside for affordable housing, such as tax breaks to builders for building more low income and first-time homebuyers.

Biden did that during his four years with his Housing Action Plan, that subsidized affordable housing as well as rents, but alas, much of that funding has been cut by Trump’s DOGE team in the name of downsizing government.

And a brisk summary of what Trump is doing to HUD, the government’s main housing administrator, is summarized by Shelterforce:

· HUD relaunched its website in late March, after removing 90 percent of

its content, under the pretext of improving user experience. Research publication archives, recent press releases, and much more were removed, and a religious quote of Secretary Turner’s was placed on the homepage.

· HUD Headquarters to Be Sold: With an April 15 executive order intended

to “restore common sense to Federal office space management by freeing agencies to select cost effective facilities and focus on successfully carrying out their missions for American taxpayers,”

The Trump administration, in other words, is doing almost nothing at the federal level for housing in its quest to slash government spending in order to fund Trump’s tax cuts.

Why must the federal government do better to support housing? The GW Bush administration set housing construction back a decade by causing the housing bubble with lax regulation and too easy credit conditions.

The American people will want a government that better serves Americans’ housing needs to make up for the years of mismanagement and neglect. Otherwise, the dream of many Americans for more affordable housing will forever be out of reach.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

We Can Fix the Housing Shortage

 The Mortgage Corner

“Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,428,000. This is 5.2 percent above the revised June estimate of 1,358,000 and is 12.9 percent above the July 2024 rate of 1,265,000. Single-family housing starts in July were at a rate of 939,000; this is 2.8 percent above the revised June figure of 913,000.” US Census Bureau

FREDconstruction

The housing shortage is something most of us worry about but are helpless to fix, it seems. There are many culprits—the NIMBY crowd that won’t allow more affordable housing near their single-family homes in cities, too high mortgage rates, but most of all the seeming inability of builders to supply enough new homes due to the shortage of construction workers.

First some history. Originally, much of it was due to the busted housing bubble that led to the Great Recession in 2008. More than one million new homes were built than could be sold, a classic example of oversupply. This resulted in just 600,000 new homes being constructed annually until 2012 when the Fed began its quantitative easing policies under Fed Chair Ben Bernanke that dropped 30-year fixed mortgage rates below 5% for the first time since the 1970s.

This is why I’m using residential housing construction as a good way to measure housing supply in the above FRED graph of housing construction. Starts have hovered around 1.4 million units since 2022 and the end of the COVID-19 pandemic (gray bar).

Construction had soared immediately after the pandemic due to the rock-bottom 30-year fixed mortgage rates, then plateaued to the current 1.4 million. But the Fed raised the rock-bottom rates to combat surging inflation and fixed mortgage rates soared to 7%, making housing purchases almost unaffordable to first-time, entry level buyers.

So, we know high mortgage rates are a major component of the housing shortage. But we can also answer maybe the largest part of the problem, the lack of new homes as highlighted in a recent Forbes Magazine article. Trump’s immigrant sweeps are not only hurting housing construction, but the job market in general.

“Immigrants make up 34% of the construction workforce, according to the Associated General Contractors of America. In states like California, Texas, New Jersey, Florida, Georgia and New York, they account for about half. Construction drives 4.5% of U.S. gross domestic product, making it the country’s tenth largest industry.

“Broaden the view and the impact grows. Residential housing, once you include rent and utility payments, fuels 15 to 18% of GDP, according to the National Association of Home Builders. Add commercial building to the mix and construction rises to the top of the chart.”

The good news what may come out of the housing shortage and homeless scourge. The highly unpopular immigrant sweeps of ICE agents invading homes, public streets, and workplaces.

The sharp drop in nonfarm payrolls in the last three unemployment reports is being blamed on the loss of possibly one million immigrants from our labor force, according to labor economists. This will hurt economic growth, because immigrants have traditionally supplied one million new Americans each year to our rapidly declining population growth rate.

Forbes cites a working paper published this month from the American Enterprise Institute (AEI), a conservative economics policy center, that found the Trump administration’s immigration policy will “likely result in a negative net migration in 2025—something the U.S. has not experienced in decades”—that would shrink labor participation and “put significant downward pressure on growth in the labor force and employment.”

It's a very sad tale. Trump’s Republicans have turned their backs on what has been the life blood of American Democracy that we can do little about without  without recognizing that we can't do it without immigrants.

Harlan Green © 2025

Follow Harlan Green on: https://twitter.com/HarlanGreen

The Return of Stagflation

 The Mortgage Corner

“From the same month one year ago, the PCE price index for June increased 2.6 percent. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago.” BEA.gov

FREDpceinflation

President Trump hasn’t succeeded in convincing the Federal Reserve to cut interest rates or fired Chairman Jerome Powell just yet. So he fired the head of the Labor Department’s Bureau of Labor Statistics without cause that published the weak July unemployment report instead.

It is heralding another era of stagflation that has destroyed the wealth of too many Americans.

It now looks like he wants to recreate what happened to two other Republican Presidents—manipulating the data to disguise the fact that looming inflation can be a big problem as it was in the stagflation of the 1970s and housing bubble and Great Recession of 2008 that was the worst economic downturn since the Great Depression.

President Nixon first tried it when combatting the looming oil price-inspired inflation from the Arab Oil Embargo by fixing prices to keep them artificially low, then pushed his Fed Chair Arthur Burns to keep interest rates low in the face of slowing economic growth caused by the OPEC embargo.

It resulted in 14 percent inflation in 1980 that caused then Fed Chair Paul Volcker to raise the Fed Funds rate to 20 percent, resulting in two recessions early in President Reagan’s tenure.

President GW Bush also tried it in 2000 by pushing then Fed Chair Alan Greenspan to keep interest rates low to finance his wars on terror. Greenspan held interest rates too low for too long, which resulted in the housing bubble and Great Recession that followed.

And now Trump is looking for a successor to the Senate-vetted BLS official, Dr. Erika McEntarfer, who will manipulate employment statistics for him. The result will be less trusted unemployment reports, masking the effects of historically high tariffs that will again create product shortages and slow economic growth.

The Labor Department’s unemployment report understated what happened in the past three months, as I said last week. The U.S. economy created 73,000 nonfarm payroll jobs, but just 19,000 and 14,000 payroll jobs in revisions to May and June totals when more data came in (see graph).

The change in total nonfarm payroll employment for May was revised down by 125,000, from +144,000 to +19,000, and the change for June was revised down by 133,000, from +147,000 to +14,000, per the BLS.

Trump’s main reason for wanting to manipulate economic facts? He also wants to hide the damage to the employment numbers from what could be the loss of one million immigrants leaving the adult labor force, many of them running for cover because of the Gestapo tactics of Trump’s Homeland Security masked Storm Troopers breaking into homes and businesses to round up as many undocumented immigrants as possible, as I said last Friday.

It’s really the first indication of the immigrant’s importance in our economy, and why most of July’s hiring was in healthcare (55,000) while government employment lost 12.000 jobs and -87,000 jobs this year.

The next economic shoe to drop will be the changing of the guard at the Federal Reserve. Trump could not bully Fed Chair Powell to lower interest rates sooner, but that will soon change when he appoints a new Fed Chairman.

He will want to politicize the Fed as he is doing to the rest of the federal government when Powell steps down next year, so that he can enact more Republican ‘trickle down’ economic policies first initiated by President Reagan: in particular the tax cuts + deregulation that supposedly increases efficiencies and productivity, but instead increased corporate CEO pay to more than 300 times that of their employees while weakening union collective bargaining laws.

The results of ‘trickle-down’ economics have been frightfully obvious for decades. The Reagan-era creation has succeeded in maximizing profits of the owners of capital and corporate CEOs while suppressing incomes of salaried workers via right to work laws and low minimum wages, mostly in the poorest Republican controlled red states.

It’s why economists are now calling this the second Gilded Age. We are seeing the results—higher inflation and slowing economic growth once again unless a majority of Americans can be convinced to stop the steal of the worst robber baron of all.

Harlan Green © 2023

Follow Harlan Green on: https://twitter.com/HarlanGreen

When Will Housing Recover?

 The Mortgage Corner

“Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year,” John Williams, New York Fed President.

 

NPR

Such remarks mirror what many of the Fed Governors who vote on interest rates are saying. Expectations for higher interest rates abound as a result of the inflation expectations. It’s why the housing market may have to wait until next year to recover. The 30-year fixed mortgage rate is still hovering close to 7 percent, which is keeping first-time buyers out of the housing market and elevating rental rates.

There are other reasons to wait, of course. The housing shortage, a lingering victim of the slow recovery from the Great Recession’s busted housing bubble, is keeping home prices from declining.

And President Trump’s on-and-off attempts to bully Fed President Jerome Powell and the 12 Fed Governors to lower interest rates isn’t succeeding, despite Trump’s daily insults.

It’s another version of TACO Trump’s negotiating skills. He only knows how to bully, which is why he has left a trail of bankruptcies and lawsuits throughout his business career. But Trump keeps denying he is about to fire the Fed Chairman that he appointed in his first term.

It’s also why Trump and his allies claim tariffs are not causing inflation, and the president saying, “inflation is dead” so he can justify his push for rate cuts. Trump has called on the Fed to slash interest rates by as much as 1%, with the Fed’s benchmark rate still in the 4.25%-4.5% range.

That will ultimately happen because there is almost unanimity among economists that the tariffs will make everything more expensive, which will ultimately slow growth enough to require the Fed to act.

Realtors and some economists are also calling for lower mortgage rates to strengthen the housing market. Mark Zandi, chief economist of Moody’s Analytics is worried “Housing will … soon be a full-blown headwind to broader economic growth,” he wrote in a post on X and LinkedIn, “adding to the growing list of reasons to be worried about the economy’s prospects later this year and early next,” as cited by MarketWatch.

There is a slight hope that home sales might improve this year, according to the National Association of Realtors (NAR). Pending home sales—that are homes under contract but not closed—increased by 1.8% in May from the prior month and 1.1% year-over-year, according to the National Association of REALTORS® Pending Home Sales report.

"Consistent job gains and rising wages are modestly helping the housing market," said NAR Chief Economist Lawrence Yun. "Hourly wages are increasing faster than home prices. However, mortgage rate fluctuations are the primary driver of homebuying decisions and impact housing affordability more than wage gains.”

Existing-home sales have been stagnant for years, hovering around 4 million annual sales since January 2022 when the Fed first began to raise interest rates, but were up +0.8% from April to a seasonally adjusted rate of 4.03 million in May 2025. Sales declined 0.7% year-over-year, however.

When will builders have enough confidence to build more homes, including affordably priced homes? New home sales, which constitute approximately 13.4% of all US home sales, dropped 13.7% in May 2025 to a seven-month low of 623,000 units. This decline was the largest since June 2022.

Builder confidence in the market for newly built single-family homes was 34 in May, down six points from April, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This ties the November 2023 reading and is the lowest since the index hit 31 in December 2022.

Interest rates must eventually come down because as Mark Zandi says, poor housing sales are already a “full-blown head wind” to higher growth and the Fed will have to act to counter the added ‘head wind’ from the tariffs.

But how long must we wait for that to happen, and will it be soon enough to prevent something even more serious from happening?

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

What Happened to Animal Spirits?

 Financial FAQs

"We're seeing a strong divergence between animal spirits of the stock market and what we're actually seeing unfold from businesses and business leaders," a White House official told reporters Monday, CNBC reported, adding, "The latter is obviously more meaningful than the former on what's in store for the economy in the medium to long term."

FREDconsumersentiment

The White House admission that the rise in “animal spirits” over Trump’s reelection had waned and that business leaders with were guiding the financial markets lower “in the medium to long term” because of Trump’s on again, off again tariff announcements, thereby doubting the possibility that the Republican campaign promises of lower taxes and fewer regulations will be of much benefit.

Such market enthusiasm couldn’t last when it became obvious that Trump’s contradictory messaging and his lack of knowledge about foreign trade could lead to tariff wars, which in the words of a growing number of business leaders, showed “he doesn't know what he is doing”.

Consumers are beginning to catch on as well, which is resulting in the decline of their own animal spirits. The above chart of declining consumer confidence as measured by the University of Michigan last peaked in January 2024 with Donald Trump’s re-election, when consumers believed in Trump’s promises to bring down inflation on “Day 1” of his second term.

But that hasn’t yet happened, and consumers are not happy about it. In the words of the U. of Michigan’s survey director Joanne Hsu:

“Consumer sentiment fell for the second straight month, dropping about 5% to reach its lowest reading since July 2024. This decrease was pervasive, with Republicans, Independents, and Democrats all posting sentiment declines from January, along with consumers across age and wealth groups.”

The term, “Animal Spirits”, was first coined during the Great Depression to explain why consumer behaved the way they did. Roosevelt’s New Deal that gave workers more benefits, such as the 8-hour work day, workers compensation, and social security, was created to boost their spirits and led to the recovery from the Great Depression.

Nobel Laureates George Akerlof and Robert Shiller even wrote a book about it that was entitled, Animal Spirits; How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

It was an important book because it refuted the long-held theory that so-called free market, or Laissez Faire, economic theories create more sustained growth with fewer regulations.

But Republicans’ touting of the benefits of sless regulated markets was a giant lie that led to President Reagan’s trickle-down economic theories, because with little or no oversight or regulations of their trades, the wealthiest always prospered the most because they had the time and money to research the markets.

Therefore conservatives that favored less regulation had to create a myth that some of that wealth was bound to “trickle down” to Main Street and benefit ordinary wage-earners to placate voters.

Professors Akerlof and Shiller showed it was a lie. Most consumers in fact do not have the resources or knowledge to adequately research what they buy or invest in. They discovered in their research that most consumers act on hearsay, or word of mouth, in making purchase decisions, including when to buy real estate.

And because consumers didn’t or wouldn’t do the necessary historical research in early 2000 when buying homes, but believed that housing prices could never decline, they pushed up housing prices so much that builders built too many homes, which was a major reason for the busted housing bubble and resultant Great Recession.

History has shown that the tax cuts and market regulations the Trump campaign promised will make the wealthy even wealthier, and 80 percent of Americans that are wage earners, less wealthy.

It’s the real reason Trump has unleashed “Chainsaw Musk”—to terrorize government workers into quitting their jobs and destroy as much as possible of Roosevelt’s New Deal, and the laws and regulations that have benefited most Americans since then.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

HOUSING IN RECOVERY--PART II

 The Mortgage Corner

Existing-home sales rose 2.2% in December to a seasonally adjusted annual rate of 4.24 million, the strongest pace since February 2024 (4.38 million).

FREDexistinghomesales

The huge jump in existing-home sales on still very high mortgage rates illustrates the enormous pent-up demand for rental or owner-occupied housing, I said last month. Demand is now exceeding the existing home inventory, just a 3.8 months’ supply vs. the 8-month supply of new homes for sale that is only partially filling the housing supply shortage. Realtors believe the strong demand will continue, in spite of the high rates.

"Home sales momentum is building," said NAR Chief Economist Lawrence Yun. "More buyers have entered the market as the economy continues to add jobs, housing inventory grows compared to a year ago, and consumers get used to a new normal of mortgage rates between 6% and 7%."

It remains to be seen how long consumers will tolerate such high mortgage rates. The 2001 Dot-com recession was the last time conforming 30-year fixed rate mortgages were above 7 percent, when existing-home sales then began the climb to a 7 million annual rate, before the long decline in interest rates. It all led to the 2007 housing bubble and Great Recession. If such demand continues, could we see another era of irrational exuberance as happened then? That’s grist for another column!

Existing-home inventory registered at the end of November was 1.33 million units, down 2.9% from October but up 17.7% from one year ago (1.13 million). Unsold inventory sits at a 3.8-month supply at the current sales pace, down from 4.2 months in October but up from 3.5 months in November 2023.

This is why building more new homes is so important. It is why builders have built up an 8-month inventory. And it is why sales of newly single-family houses in December 2024 were also so high, at a seasonally adjusted annual rate of 698,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development, above the December 2023 estimate of 654,000.

Even pending home sales jumped, another sign of an incipient housing recovery, Pending sales help to predict closings 30 to 60 days out. Pending home sales gained 2.2% in November – the fourth consecutive month of increases and the highest level since February 2023 – according to the National Association of REALTORS®.

“Consumers appeared to have recalibrated expectations regarding mortgage rates and are taking advantage of more available inventory,” said NAR Chief Economist Lawrence Yun. “Mortgage rates have averaged above 6% for the past 24 months. Buyers are no longer waiting for or expecting mortgage rates to fall substantially. Furthermore, buyers are in a better position to negotiate as the market shifts away from a seller’s market.”

Builders blame “unnecessary regulations” for much of the housing shortage. However, most of the ‘unnecessary regulations’ are at the state and local levels, such as restrictive zoning, state environmental laws, and even banking regulations.

It’s difficult to see how the outcome of national elections can affect such local changes. California is one such state that has taken on the NIMBYs (Not in my backyard) crowd as well as putting aside loan subsidies for affordable housing. That’s where the changes need to be to make up for the current housing shortage.

It’s hard for me to see that we will have another 7-million-unit sales year as happened during the housing bubble, however, no matter the mortgage rates. It was a different era, for those that can remember, since we have an ongoing labor shortage and higher construction costs (tariffs?) today.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Our Housing Problem

 The Mortgage Corner

We know we have a housing shortage, but not how to fix it. Politicos are finally beginning to take notice because of the damage that has been done—especially to working Americans who no longer can afford a home of their own.

VP Harris is the first to respond to the need, saying she has a policy to create 3 million new dwellings in her first term as President, if she is elected. In addition to the one million units already in various stages of development, she would create two million additional units with the following incentives:

• · A new tax incentive for building starter homes
• · Expanding tax incentives for businesses that build affordable rental housing
• · Double the Biden-Harris proposed innovation fund for local initiatives to solve housing issues
• · Cut red tape and streamline permitting processes to get houses up quicker

Why shouldn’t governments fix it? The primary cause of our housing shortage was the busted housing bubble when one million too many homes were built for a number of reasons that caused the housing bubble, such as those liar loans that lenders allowed to qualify buyers with no real income.

But lax government regulation was also part of the problem. There was very little oversight of the financial chicanery that caused the failure of Lehman Brothers and the Great Recession that followed.

Housing construction went from a high of 1.4 million units annually in 2005 to just 600,000 units per year in the 10 years that followed the Great Recession.

Because of its severity, builders stopped building enough homes for a population that continued to add one million new households every year. That’s a shortfall of 4 million units over 1o years(1m-600kx10=4m). Add the fact that the millennial generation was the most populous generation since the baby boomers and had nowhere to live—so many continued to live with their parents.

It will take multiple government actions, from changing zoning laws that create more density at the state and local levels to a national program such as VP Harris outlined to cure the shortfall.

The private sector has supported public sector help in the past, when cures for the 10-year construction lapse were being discussed. I wrote about it in a 2012 Huffington Post blog piece:

“Congress isn't the only reason for housing's problem. The Obama administration is still not serious about either their HAMP or HARP II loan modification programs. They had set aside some $11 billion from the ARRA legislation back in 2009 that hasn't been spent!

“The result was banks and Wall Street kept begging the Federal Reserve to provide stimulus by buying up to as much as $1 billion more of mortgage-backed securities (to keep mortgage rates low).”

There are signs of life in today’s housing market. Mortgage rates have been plunging since the Federal Reserve began to cut interest rates, and new-home construction has picked up with enough supply to lower new-home prices. The seasonally adjusted estimate of new houses for sale at the end of August was 467,000. This represents a 7.8 month supply at the current sales rate. The median sales price of a new home sold in August fell to $420,600 from $429,000 in the prior month.

Census Bureau

Sales of new single-family houses in August 2024 were at a seasonally adjusted annual rate of 716,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7 percent (±10.6 percent)* below the revised July rate of 751,000, but is 9.8 percent (±22.1 percent)* above the August 2023 estimate of 652,000.

It could be the beginning of an upward trend in overall sales, but the question now is not so much about mortgage rates, which will help sales and affordability, but adequate supply that matches more closely with household formation.

The dearth of supply is just one of the ways Americans have been paying for the excesses of the Great Recession and housing bubble. It can only be fixed with a national program that teams the public and private sectors to make housing affordable once again for entry-level as well as middle class American renters and buyers.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

How Do We Solve It?

 The Mortgage Corner

I speak of the housing shortage, as much as 2 million residential units—owner-occupied and rental units—according to housing economists. What is to be done with mortgage rates at historic highs and material shortages everywhere?

Much of it was the result of the busted housing bubble, and the overbuilding of some one million housing units in the early 2000s. The Great Recession followed, when millions more lost their homes. Construction activity ground to a halt and we are still playing catchup.

 Calculated Risk

Sales of previously owned homes in May fell 0.7% to a seasonally adjusted annual rate of 4.11 million. The stronger-than-anticipated result was still the lowest rate since January and about 20% below the long-term average for May of more than 5 million sales said Calculated Risk. It was the lowest May number since the housing market was recovering from the immediate shock of the Covid-19 pandemic in 2020.

The supply of existing homes for sale is growing slowly. At May’s sales pace, it would take 3.7 months to sell every home on the market. That is the highest in four years, according to Lawrence Yun, the Realtor’s chief economist.

“Eventually, more inventory will help boost home sales and tame home price gains in the upcoming months,” Yun said in a statement. “Increased housing supply spells good news for consumers who want to see more properties before making purchasing decisions.”

Just looking at the existing home sales graph, as many as 7 million homes were sold in early 2000 when the housing bubble peaked. Irrational exuberance reigned, and consumers thought housing prices could never fall. Sales rose again to more than 6 million units in early 2020 when interest rates plunged again during the pandemic.

Zillow the real estate data company, maintains from 2021 to 2022, the U.S. housing shortage grew to 4.5 million homes, up from 4.3 million, while in 2022 the number of U.S. families increased by 1.8 million, while only 1.4 million housing units were built.

It’s the same problem today. Privately‐owned housing starts (i.e., under construction) in May 2024 were at a seasonally adjusted annual rate of just 1,277,000. This is 5.5 percent below the revised April estimate of 1,352,000 and is 19.3 percent below the May 2023 rate of 1,583,000.

Today it is the direct result of the Fed’s inflation fight. High interest rates have

driven up the cost of everything, since real estate is dependent on borrowing large sums of money, as any homebuyer can tell you.

It’s hurting home builders, as Builder confidence in the market for newly built single-family homes was 43 in June, down two points from May, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the lowest reading since December 2023.

“We are in an unusual situation because a lack of progress on reducing shelter inflation, which is currently running at a 5.4% year-over-year rate, is making it difficult for the Federal Reserve to achieve its target inflation rate of 2%,” said NAHB Chief Economist Robert Dietz.

The best way to bring down shelter inflation and push the overall inflation rate down to the 2% range is to increase the nation’s housing supply, say the builders. “A more favorable interest rate environment for construction and development loans would help to achieve this aim,” said Dietz.

The Fed can see that inflation has been tamed, as much as possible, given their predictions for strong economic growth the rest of this year. I may be overdoing the bold lettering to make such an obvious truth but what else would boost the housing supply and so reduce inflation?

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

No Recession Next Year?

 Financial FAQs

Fortune Magazine has come up with the most interesting reasons for a looming recession in a recent edition.

“Here are six reasons why a recession remains Bloomberg Economics’ base case. They range from the wiring of the human brain and the mechanics of monetary policy, to strikes, higher oil prices and a looming credit squeeze — not to mention the end of Taylor Swift’s concert tour.”

I’m not sure just what the wiring of the human brain has to do with recessions, other than  Nobelist Robert Shiller’s research on human behavior; that most financial decisions are based on hearsay, rumors, and plain old irrational exuberance.

The housing bubble was caused by such behavior. Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession.

Fortune Magazine should add blockbuster movies like Barbie and Oppenheimer, if they want to attribute our current economic health to happy consumers enjoying leisure activities; but their current temperament could change with bad news.

Oil prices are falling, the strikes have been settled with employees winning bigtime with better benefits, and the current credit squeeze hasn’t hurt current record employment and consumer spending to date per below graph (gray bars are recessions).

FREDunemployment

Federal Reserve Governors have also been sounding more dovish on interest rate policy of late.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said at his last press conference of this year. The Fed is “likely at or near the peak rate for this cycle.”

That leaves what Bloomberg believes is the major determinant of a possible recession; the “looming credit squeeze” due to the continuation of higher inflation and interest rates. So, we don’t yet know the full effect of the sudden hike in interest rates engineered by the Fed since March 2022, some 18 months ago that has made borrowing more expensive.

But consumers seem to act rationally when it affects their pocketbooks, especially from too high prices and interest rates. Their record spending on leisure activities could change if the Fed doesn’t begin to lower interest rates in the spring, as I said.

The so-called Fed Funds rate has been at its high point of 5.25 to 5.50 percent from August 2023, just five months, whereas Greenspan’s Fed held rates at their maximum for eight months, from August 2006 to June 2007. The Great Recession was determined to have begun in December 2007.

So there isn’t much room left to avoid a recession, is there? Watch the actual behavior of interest rates to know what consumers will do next!

Harlan Green © 2023

Harlan Green on Twitter: https://twitter.com/HarlanGreen

Please Lower Interest Rates Sooner!

 Financial FAQs

If I were the Fed Governors, I wouldn’t wait for inflation to drop further to begin lowering interest rates. The inflation rate has been falling steadily for more than a year and we might be in the midst of a deflationary spiral. Sound impossible? It could be if the Fed doesn’t see the writing on the wall.

The cost of living measured by the Consumer Price Index rose just 0.1 percent in November thanks to lower oil prices. Without food and gas prices, so-called core consumer prices rose a somewhat sharper 0.3 percent last month and matched the Wall Street forecast. And the annual rate of inflation slowed to 3.1 percent in November from 3.2 percent in the prior month, matching the lowest level since early 2021.

The next stage could be outright deflation, which nobody wants because it has spelled recession in the past. Why? Because the steep decline in inflation over a short period means a looming oversupply of things at the same time as sky-high interest rates, and that was the cause of past recessions.

The first indication of oversupply is gas prices, which are falling fast. As of Monday, the average national price for regular unleaded gasoline stood at $3.153 a gallon, down from $3.242 a week ago, and down from $3.376 a month ago, according to AAA.

AAA.com

The main reason is a weaker cost for oil, which is struggling to stay above $70 per barrel.  The falling price comes just a week after OPEC+ announced voluntary production cuts of about 2 million barrels daily. 

“Historically, crude oil tends to drop nearly 30 percent from late September into early winter with gasoline prices trailing the play,” said Andrew Gross, AAA spokesperson. “More than half of all US fuel locations have gasoline below $3 per gallon. By the end of the year, the national average may dip that low as well.”

Inflation is falling fast with the 6-month CPI already down to 2.5 percent, yet unit wages are rising 4.0 percent annually in November’s unemployment report. So inflation today is being caused by higher rents and used cars, not oil prices as happened in the 1970s or rising wages.

We now know why inflation is falling. Nonfarm labor productivity is soaring, up 5.2 percent in the third quarter of 2023 as output increased 6.1 percent and hours worked increased 0.9 percent.

The increase in labor productivity is the highest rate since the third quarter of 2020, when productivity increased 5.7 percent. From the same quarter a year ago, nonfarm business sector labor productivity increased 2.4 percent.

The last time we approached bubble territory was an oversupply of housing in early 2000 that led to the housing bubble and Great Recession. Labor productivity was as high in Q1 2002 at 5.8 percent.

Under Fed Chairman Alan Greenspan, the Fed didn’t recognize the housing bubble until it was too late (In part due to lax supervision by the GW Bush administration Treasury and Greenspan’s Fed). In fact, he even encouraged homebuyers to take out adjustable-rate mortgages to prolong the housing market rally.

He then held the same 5.25 percent Fed Funds rate too long—10 months from August 2006 to June 2007—before the fed began to drop rates.

But by then it was too late. The Great Recession began in December 2007. Housing values had already begun to plunge due to a one-million-unit oversupply and the mortgages tied to them became worthless because they could no longer be serviced due to soaring mortgage rates that followed the Fed’s rate hikes.

Can this happen again? There is a pronounced undersupply of housing today with builders racing to catch up, so there is little danger of a housing bubble. Instead of looking backwards to the 1970s when oil shortages led to the inflationary spiral, the Fed should be focusing on possible oversupply today and falling prices as the production of things continues to ramp up.

There could be an oversupply in the industrial sector, for instance—of computer chips in particular as new factories begin to produce, and ordinary commodities as labor productivity stays high with AI and supply-chains continue to improve.

And let’s not forget the four bank failures to date due to the Fed’s rate hikes. The Fed should not forget the failure of Lehman Brothers and many other financial institutions that was also part of the Great Recession.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Homeowners Have Record Equity

 The Mortgage Corner

Meredith Whitney, a noted real estate consultant recently interviewed on CNBC’s Squawk Box, said American homeowners have a record amount of equity in their homes. The average Loan-to-Value (LTV) of mortgages has dropped to 30 percent, which means they have 70 percent equity in their homes.

She asserted, therefore, there is little to no chance of another busted housing bubble as happened in 2007 that led to the Great Recession. Many economists see the real estate sector as a leading indicator of what may happen next to our economy. It could mean there is even less of a chance that a recession may occur this year if it is based on a collapse of real estate values as happened in 2007.

Corelogic

“The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic,” reports CoreLogic Chief Economist Selma Hepp. “Also, while homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity.”

The U.S. housing market is short more than 300,000 affordable homes for middle-income buyers, according to a new analysis from the National Association of Realtors^® and Realtor.com^®.

“Middle-income buyers face the largest shortage of homes among all income groups, making it even harder for them to build wealth through homeownership,” said Nadia Evangelou, NAR senior economist and director of real estate research. “A two-fold approach is needed to help with both low affordability and limited housing supply. It’s not just about increasing supply. We must boost the number of homes at the price range that most people can afford to buy.”

Households have another leg to stand on despite rising interest rates. The net worth of U.S. households rose by 2 percent in the first three months of the year to $148.8 trillion, putting it close to a record high and suggesting the economy might have enough fuel to keep growing or at least to avert a steep recession, according to the Federal Reserve’s flow of funds report.

INGeconomics

Most of the increase in net wealth in the first quarter was tied to a rebound in the stock market. The value of equities held by households jumped by $2.4 trillion. The ING graph shows the actual increase in the orange bars above the blue line pre-COVID trend.

Household debt increased at a 2.2 percent annual rate in the first quarter to $19.2 trillion, marking one of the smallest increases in the past decade. Debt had grown as fast as 8 percent as the U.S. emerged from the pandemic, said the Federal Reserve.

Meredith Whitney in another Barron’s interview, said reviving the housing sector from its current slump means finding housing for Gen Z’ers and the second half of millennials that don’t have money. How are they going to become homeowners?

The construction industry is trying to help. Calculated Risk’s Bill McBride reported recently that there are 1.675 million units under construction, just 35 thousand below the all-time record of 1.710 million set in October 2022.

Of these, there are currently 977 thousand multi-family units under construction.  This is the highest level since September 1973, and close to the record of 994 thousand in 1973 (being built for the baby-boom generation).

So builders and home seekers are seeing that the alternative to buying is renting and that has to make up the difference until more affordable housing is constructed.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Market Recovering

 The Mortgage Corner

Census.gov

Real estate is the industry most affected by rising interest rates, so it’s encouraging to see that housing sales are showing signs of a revival. Both new-home and pending home sales jumped in January, even with still expensive mortgage rates.

One reason: builders are buying down those mortgage rates.

Sales of newly built, single-family homes in January increased 7.2 percent to a 670,000 seasonally adjusted annual rate from an upwardly revised reading in December, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

And it’s not that expensive for a builder to offer an affordable mortgage rate—just 4 points (%) to buy down a conforming 30-year fixed rate mortgage to 4.875%; not that much to tack onto a sales price.

“The latest HMI survey shows 57% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB). “Buyer incentives, along with stabilizing mortgage rates during the month of January, increased the pace of new home sales for the month. However, in a sign of current market weakness, sales are down 19.4% compared to a year ago.”

Pending home sales also improved in January for the second consecutive month, according to the National Association of Realtors^Ò.

The Pending Home Sales Index (PHSI)^* — a forward-looking indicator of home sales based on contract signings — improved 8.1 percent to 82.5 in January. (But) Year-over-year, pending transactions dropped by 24.1 percent.

“Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR Chief Economist Lawrence Yun.

What is causing more optimism among homebuyers? Builders are seeing more traffic from new-home wannabes, for starters.

The National Association of Builders reports two consecutive solid monthly gains for builder confidence, spurred in part by easing mortgage rates, signal that the housing market may be turning a corner even as builders continue to contend with high construction costs and building material supply chain logjams.

A more immediate reason for the improvements is an acute housing shortage. Builders essentially stopped building new homes for a decade after the Great Recession and busted housing bubble.

“With the largest monthly increase for builder sentiment since June 2013, excluding the period immediately after the onset of the pandemic, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” said NAHB Chairman Alicia Huey. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing.”

The NAR anticipates the economy will continue to add jobs throughout 2023 and 2024, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.

Most prospective homebuyers are still on the sidelines, however. The Conference Board reported a further decline in consumer confidence reflecting large drops in confidence for households aged 35 to 54 and for households earning $35,000 or more,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board.

“While consumers’ view of current business conditions worsened in February, the Present Situation Index still ticked up slightly based on a more favorable view of the availability of jobs. In fact, the proportion of consumers saying jobs are ‘plentiful’ climbed to 52.0 percent—back to levels seen in the spring of last year.”

So what are homebuyers to do? Should they look for homebuilders willing to buy down that mortgage to 4.875%, or wait while housing prices continue to climb?

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Here's To a Lasting Housing Recovery!

The Mortgage Corner

Since it is the holidays, I want to propose a New Year’s toast to a lasting housing recovery.

Firstly, home builders are beginning to play catch up with the housing shortage that has plagued those wanting a place to live since the end of the Great Recession and busted housing bubble. That’s when construction ground to a halt because one million more homes were built than were needed at the time.

Does this mean the housing market could begin a decade-long recovery as has happened in the past? It’s possible. Consumers are flush with cash from the pandemic aid and the personal savings rate is still at a post-recession high (6.9 percent).

More than 1,800,000 housing units per year were constructed during the height of the housing bubble in 2006 (see below graph), which fell to just 400,000 units annually during the Great Recession in 2008 (gray bar), which is part of the reason for the current housing shortage.

The last two recoveries lasted approximately 10 years. So why not toast the possibility that this may be a housing recovery that might last, if the other roadblocks to a housing recovery, labor material shortages should ease next year?

CalculatedRisk

Construction is booming, which should begin to fill the very low inventory of homes for sale, despite the labor and material shortages.

“Single‐family housing starts in November were at a rate of 1,173,000; this is 11.3 percent above the revised October figure of 1,054,000. The November rate for units in buildings with five units or more was 491,000,” according to the Census Bureau.

Calculated Risk

Rising existing-home sales are helping to fill the housing need. Existing-home sales rose 1.9 percent to a seasonally adjusted annual rate of 6.46 million in November, the National Association of Realtors said Wednesday. That is the third straight monthly gain. And there is room to grow more sales.

More than 7 million existing homes were sold in 2005 at the height of the housing bubble, per the above existing-home sales graph but sales declined to 4 million in 2008 during the Great Recession (gray bar in graph).

Unsold inventory is at a 2.1-month supply in November, the lowest since January. That’s down from 2.3 in the same month last year, and a 4 to 6 month supply of homes for sale during more normal times.

“Supply-chain disruptions for building new homes and labor shortages have hindered bringing more inventory to the market,” said NAR chief economist Lawrence Yun. “Therefore, housing prices continue to march higher due to the near record-low supply levels.”

There’s better economic news as well that may help to cure the housing crunch. Third quarter GDP growth was revised up slightly to 2.3 percent, and Q4 growth is projected to be even higher.

Consumer confidence is also on the rise again with the holidays. The index of consumer confidence rose to 115.8 in December from a revised 111.9 in the prior month, The Conference Board said Wednesday.

Lynn Franco, Senior Director of Economic Indicators at The Conference Board said, “The Present Situation Index dipped slightly but remains very high, suggesting the economy has maintained its momentum in the final month of 2021. Expectations about short-term growth prospects improved, setting the stage for continued growth in early 2022. The proportion of consumers planning to purchase homes, automobiles, major appliances, and vacations over the next six months all increased.”

So this is the best time to raise a toast to a continued housing recovery—and a Happier New Year!

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

 

January Home Sales Exceed Expectations

 The Mortgage Corner

Calculated Risk

The Calculated Risk/FRED graph shows that new-home sales are approaching the 2000 level at the start of the last housing bubble that ultimately resulted in the Great Recession (blue bars are recessions). But that doesn’t mean we are at the beginning of another housing bubble.

New home sales for January were reported at 923,000 on a seasonally adjusted annual rate basis (SAAR), said US Census Bureau, resulting in the decline to just 4.0 months of supply remaining for sale. That and still record low interest rates are boosting prices. But there is no bubble forming because there is not enough supply to satisfy current demand. Sales for the previous three months were revised up, also.

Existing-home sales are soaring this early in the year as well because last year’s selling season had a delayed fall start due to the pandemic, according to the National Association of Realtors (NAR). We can expect this surge to also continue because of ongoing demand.

Total existing-home sales, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.6 percent from December to a seasonally-adjusted annual rate of 6.69 million in January. Sales in total climbed year-over-year, up 23.7 percent from a year ago (5.41 million in January 2020).

Demand is so hot that the median existing-home sales price rose to $303,900, 14.1 percent higher from one year ago. And as of the end of January, existing-home inventory fell to a record-low of 1.04 million units, down by 25.7 percent year-over-year – a record decline.

"Home sales continue to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market," said NAR chief economist Lawrence Yun. "Sales easily could have been even 20% higher if there had been more inventory and more choices."

Residential construction is pushing hard to catch up to demand, as I said last week. Privately-owned housing starts in December were at a huge seasonally adjusted annual rate of 1,669,000, said the Census Bureau. This is 5.8 percent above the revised November estimate of 1,578,000 and is 5.2 percent above the December 2019 rate of 1,587,000.

Home sales are repeating their traditional role as a leading indicator with economic growth predicted to surge this year. Economists are now predicting a ‘V’ shaped recovery with Deutsche Bank increasing its GDP growth forecasts for 2021 and 2022, assuming the final fiscal aid package will be worth $1.6 trillion to $1.7 trillion, reports Reuters. “Their inflation numbers pushed a bit higher too with risks on the upside,” wrote Jim Reid, a strategist at the bank.

Reuters also reports Pimco, one of the world’s largest fixed income managers, said in a research note that the additional stimulus could “contribute to 2021 real GDP growth of over 7%,” a level not seen since “the great inflationary episode of the 1970s-1980s.”

Chief economist Yun expects more jobs to return in his press release, which will spur home buying in the coming months. He predicts existing-home sales will reach at least 6.5 million in 2021, even as he says mortgage rates are likely to inch higher due to the rising budget deficit and higher inflation.

But interest rates are still at recession lows, with the 30-year conforming fixed interest rate currently 2.75 percent with one origination point for the best credit holders.

With housing inventory at the end of January down 25.7 percent from one year ago, the unsold existing-home inventory sits at a record 1.9-month supply at the current sales pace, down from the 3.1-month amount recorded in January 2020.

All this news means the housing revival will continue.  What better sign is there of a consumer spending revival this year?

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Housing Construction Soars

 The Mortgage Corner

Calculated Risk

As much housing is being built today as in 2006 at the height of the housing bubble. What is going on? People want to move away from cities, where fear of COVID-19 contagion is highest, and work from home to replace empty offices as the digital economy takes over for white collar workers at least.

This looks like a more permanent transformation because Fifth Generation, 5G networks begin to kick in with up to 40 times faster transmission speeds for all kinds of AI connections that will ultimately be able to power factories, as well as offices.

Privately-owned housing starts in December were at a huge seasonally adjusted annual rate of 1,669,000, said the Census Bureau. This is 5.8 percent above the revised November estimate of 1,578,000 and is 5.2 percent above the December 2019 rate of 1,587,000.

Building permits were authorized at an even higher rate. Privately-owned housing units authorized by building permits in December were at a seasonally adjusted annual rate of 1,709,000. This is 4.5 percent (±1.4 percent) above the revised November rate of 1,635,000 and is 17.3 percent (±1.8 percent) above the December 2019 rate of 1,457,000.

This is while total existing-home sales,

This is while total existing-home sales, https://www.nar.realtor/existing-home-sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.7% from November to a seasonally-adjusted annual rate of 6.76 million in December. Sales in total rose year-over-year, up 22.2% from a year ago (5.53 million in December 2019).

"Home sales rose in December, and for 2020 as a whole, we saw sales perform at their highest levels since 2006, despite the pandemic," said Lawrence Yun, NAR's chief economist. "What's even better is that this momentum is likely to carry into the new year, with more buyers expected to enter the market."

The demand for more housing will further increase with the expanding 5G networks, as described in a World Economic Forum 2020 White Paper.

“5G will be critical because it will enable unprecedented levels of connectivity, upgrading 4G networks with five key functional drivers: superfast broadband, ultra-reliable low latency communication, massive machine-type communications, high reliability/availability and efficient energy usage. Together, these defining features will transform many sectors, such as manufacturing, transportation, public services and health.”

The WEF estimates that significant economic and social value can be generated by enabling cases activated by 5G. “An IHS Markit study estimates that $13.2 trillion in global economic value will be made possible by 2035, generating 22.3 million jobs in the 5G global value chain alone.”

There is another problem that needs to be tackled, however. The upcoming surge in evictions is on temporary hold until March. Low-income renters are most affected, as a UC Berkeley housing study found more than one million renter households in California alone had lost their jobs. And the US Census Bureau estimated that 1.9 million US tenants were behind on their rents last December.

The moratorium does not cancel out owed back rents, however. But California tenants and landlords are in line to receive some $2.6 billion in rental assistance from the coronavirus aid package approved last month, reports the LA Times. That and the additional unemployment benefits and cash aid will do much to cushion the losses incurred by both tenants and landlords due to the pandemic.

Adequate housing will be problem for years to come, in other words, so building new homes will solve only part of the problem.

Harlan Green © 2020

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen