Skyrocketing rates, shrinking affordability: The U.S. housing market is a mess. It’s also a bit of a mystery. Why are prices still sky-high, even though many measures of demand are weak? If the supply of new homes is nearing a historic high, how come the inventory for existing homes is close to a historic low? Today’s guests agree that this is one of the weirdest housing markets in recent history. Mike Simonsen, president and founder of Altos Research, and Lance Lambert, cofounder and editor-in-chief of Residential Club, join to talk about the state of the U.S. housing market—what makes it ugly, what makes it weird, and what would have to happen to make it better.
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In the following excerpt, Lance Lambert and Derek go through the exact factors that have led to the rapidly deteriorating affordability of housing in the U.S. since the beginning of the pandemic.
Derek Thompson: I think what I want to do is to frame our conversation about today’s housing market by first reviewing what’s happened with housing since the pandemic because a lot has happened to housing in America since the pandemic started.
Lance, I want to start with you. There is a widespread sense that housing affordability has gotten worse faster than any time in modern memory in this country. And sometimes economic sentiment is vibes, but sometimes it’s real. And you have written that this is very real. You’ve written that in the last few years, we have seen the fastest-ever deterioration in housing affordability. I want to get us started with just a big open question. What happened? What in your mind were the most important drivers of what you have called the fastest-ever deterioration of housing affordability?
Lance Lambert: Yeah. So if you go rewind all the way back to March 2020, there was a few-week period where people were a little scared and a little more than scared. And even builders and some of the people that I know in that space, they were worried for their own business with the lockdowns and everything. And some states actually stopped real estate showings. But very quickly, housing started to take off. And so what occurred there is that you had a period of an increase in housing demand from work from home, but it wasn’t just the work from home going to the Boises and Austins; it was also an increase in demand for space.
So even in markets like San Francisco and New York that lost residents during the pandemic, those places actually saw a decoupling of roommates. And so there was a net increase in demand for housing and for space. You had the ultra-low rates, and for the investor side, that was huge because it meant far more properties were cash-flowing. And then you also had the stimulus money and all of that, of course. But there was also a liquidity bubble, essentially, that poured over from the institutional capital markets into housing as well.
And so it was just a bull rush. And so 2020, 2021, into 2022, you had an overheating in prices where the demand, on top of the supply, it just overpowered the market. The Fed estimates that new home construction would’ve needed to increase 300 percent to match the increase in housing demand during the pandemic. That’s just not possible. It doesn’t work like that. Supply cannot respond quickly to demand, let alone [when there are] all the supply constraints and all of that as well in the market. And so you had an overheating in prices.
That was very quickly followed by the Fed going from quantitative easing mode into quantitative tightening mode. And so the interest rates, the average 30-year fixed mortgage rate went from 3 percent to 4 percent to 5 percent to 6 percent to 7 percent. And still, even some borrowers who don’t have great credit now, it could be still closer to 8 percent. So that overheating of prices, followed by a rate shock, is the fastest-ever deterioration in housing affordability because incomes just couldn’t keep up with it.
Now, if you zoom out—and those are the three core metrics for housing affordability—it actually gets even worse if you start to add in things like home insurance. So between 2018 and 2021, there was only one time that a state saw more than a 10 percent increase in home insurance, and that was Florida. Last year, it was 25 states. So home insurance is now a wild card that’s helping to deteriorate housing affordability further. And it’s not necessarily the worst housing affordability ever. It depends how you measure it. You could argue that 1981 is worse, when mortgage rates were 18 percent. But at the same time, if you’re a cash buyer in 1981 and you have 2x your income, you could go buy the house outright in cash. Whereas today when prices are 5x, 6x incomes, it’s a very different story for the all-cash buyers. So it depends on the lens that you look through.
Thompson: So bottom line, it’s not just vibes. The housing market really has experienced a perfect storm. It’s not just the decades of underbuilding, which has constrained supply. The work-from-home revolution—I’m so glad that you mentioned that—clearly was a contributor here. You had this growth in household formation as people were coming together and roommates were splitting apart. I think there was pandemic cabin fever too, people just wanting to leave whatever house they were locked in, looking on Zillow for someplace to move into.
Lambert: And I was very much in that bucket as well. My wife and I, we had lived in Manhattan four or five years before the pandemic hit. I was at Fortune magazine then, and that first week that the lockdowns hit, I was like, “We’re probably going to move home and buy a house.” [This] is what my wife and I were talking about because we had a 3-year-old in the city, didn’t have a lot of space, very expensive of course. And so it was just a good opportunity. Now, were we already going to do that? Yeah. Maybe it would’ve been 2022, maybe it’d have been 2023, but it definitely sped up our decision.
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guests: Mike Simonsen & Lance Lambert
Producer: Devon Baroldi
Subscribe: Spotify
