Over the last two and half years, builders and homeowners have been fighting supply, labor, and cost disruptions throughout the housing channel. While some would disagree, as interest rates increase and the economy slows somewhat, the disruptions may have been a blessing in disguise because the housing market did not overbuild and there is little to no speculation which could have mirrored the disaster effects of 2008. Builders and homeowners are human, and just like most people, when the times are very good and there seems to be overwhelming momentum, there is an over exuberance which can cloud rational thinking. People forget the hard lessons of the past, and they believe the good times will roll for perpetuity which is never the case.
There are fundamental issues which make this housing environment totally different from 2005-2007.
Since the Great Recession and housing bust in 2007, the United States has started and underbuilt housing. From 2008 through 2021, the country, on average, started 1,026,650 houses per year which is significantly below the national averages since 1950, but with a larger population. This created a housing deficit in the country with low inventories that persist today.
The historically low interest rates near the 3 percent range over the past several years were driven by a reactive Federal Reserve that over energized the housing market. The current 5 to 6 percent interest rates are near normal historic levels.
Tighter bank lending with truer appraisals and higher standards to qualify for a loan took the buyers out of the market who could not afford a home.
In 2021, housing starts were 1,601,000 which over stressed a supply chain that had decreased to handle the demand of 1.0 million to 1.4 million the prior 5 years. Simply put, the supply chain couldn’t keep up.
In the mid-2000s, there was plentiful labor, especially immigrant labor. Over the last 14 years, the construction industry’s loss of skilled craftspeople has been massive, and these labor shortages prevented builders from expanding production.
Finally, fundamentally there is a significant shortage of affordable housing for sale and rent in the country and this issue is far from being resolved.
If you recognize and accept the differences in the markets, here is what you can probably expect.
There will be a retreat in housing prices, but unless there is an increase in foreclosures, which no one really expects, the price moderations will be modest at best. In fact, you will probably see less of the bidding up of pricing and more prices closer to appraised values. Employment remains very strong with better wages and that usually indicates price capitulations will be slower to occur.
Supply chain disruptions continue in many areas of building supply, but for the most part the economic slowdown brought on by the Fed increasing interest rates will subdue pricing in many areas. While the slower volume or over exuberance may shake out some, the lower prices should eventually help moderate pricing for projects.
The sting of rising interest rates from 3 to 6 percent will affect entry level buyers., The reestablishing of interest rates in a normal area for housing will, in itself, build a longer-term stability in the housing market. This will require local, state, and federal government housing agencies to address some of the main cost issues in housing including, increased regulatory building and impact fees, as well as bureaucracy and codes which have destroyed most affordable housing. The masking of these costs by low interest rates will stop.
As painful and frustrating as the last few years have been dealing with all these disruptions, it would have been terrible if the housing market was overbuilt with homeowners stuck in houses that were unaffordable. Low housing inventories and high demand for housing will continue to make the housing market strong for many years., Maybe this is the beginning of the something more normal. A slowdown in housing production truly may have been a blessing in disguise for many builders and homeowners.
Don Magruder is the CEO of Ro-Mac Lumber & Supply, Inc., and he is also the host of the “Around the House” Show which can be seen at AroundtheHouse.TV.