Last year, Freddie Mac estimated the country’s housing supply deficit at 3.8 million homes, up from 2.5 million in 2018. Other analysts have come up with different numbers, but pretty much everyone agrees that the country hasn’t built nearly enough homes. to keep pace. with demand, especially for middle- and lower-income families. Failure to build those units is the biggest cause of the affordability crisis that has spread from a few coastal cities to a much larger part of the country in recent years.
Freddie Mac chief economist Sam Khater said there’s irony in what’s happening now: The Federal Reserve is trying to curb inflation by raising interest rates, leading to a slump in construction, making housing even less affordable. become. the route. In a sense, policymakers are solving the immediate cost of living (inflation) crisis by making the longer-term cost of living (housing) crisis even worse.
“It’s an unintended consequence,” said Mr. Khater.
The housing market has reacted so quickly to the Fed’s actions because it is built on debt, making it ultra-sensitive to interest rates. Builders borrow money to build new homes and then sell them to buyers who borrow 80 percent or more of the cost of the home for the most part. When banks withdraw credit by raising monthly borrowing costs, it causes buyers and builders to withdraw for different versions of the same reason, which is fear that they will be left with property they can no longer afford and may be worth less. than they paid to start it up.
The slowdown in housing construction wouldn’t have such a significant effect on the country’s overall housing supply if builders were able to quickly adjust to demand, offsetting recession deficits during boom periods. But they can’t: Housing is a hugely fragmented industry of mostly independent companies, including developers who spend decades turning raw land into building plots and subcontractors who hire workers by the hour. The system works fine when demand is high, but deteriorates even with a small sign of trouble and can take years to reboot, creating a backlog that gets bigger every time construction slows down.
“It’s much easier to turn it off than it is to turn it on,” said Mr. Palacios.
The collapse of the housing market during the Great Recession left many smaller homebuilders out of business and those who survived were extremely cautious. Housing began to fall to 554,000 in 2009, from 2.1 million in 2005, and barely recovered after that, even as demand grew steadily. Only in the past few years have developers finally started building at something close to their pre-bubble pace — only to step on the brakes as rates rise.
