THE BIG SPLASH

Blame the Boomers

Barclays economists are attributing the robustness of the US housing market to the aging baby boomer population rather than the traditional factors like mortgage lock-in effects.

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• They argue that as more boomers reach retirement age and form new households, they are increasing the demand for homes. While this might appear counterintuitive, since an aging population is typically associated with reduced housing demand, the analysts explain that there's a current crunch point where boomers are creating new households but aren't yet freeing up existing inventory by moving into senior living arrangements.

• This trend has been building for more than a decade and has accelerated during the pandemic. It's driven by demographic shifts where people move from living with parents or roommates to forming their own households as they enter their twenties and thirties. This upward pressure on household formation boosts demand for housing units, leading to higher home prices and increased construction activity.

• Despite mortgage rates at multi-decade highs and the Federal Reserve's interest rate hikes, the US housing sector continues to thrive. The population of retirement age (65 years or older) now accounts for about 16.5% of the US population, compared to 13% in 2010.

• This supply-demand imbalance is likely to persist, keeping upward pressure on house prices and rents. However, it's also encouraging additional construction to address the housing shortage. While some concerns about affordability persist, the demographic trends suggest that demand for housing will remain strong in the foreseeable future.

A SCOOP OF MARKET ANALYSIS

Prospective homebuyers in the U.S. are grappling with a severe housing shortage, leading to skyrocketing prices and an affordability crisis.

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• Estimates suggest the housing deficit in the country is around 3.8 million units. The Federal Reserve's rapid interest rate hikes, which pushed mortgage rates above 7%, created a "golden handcuff" effect.

• Homeowners with ultra-low pandemic-era mortgage rates are reluctant to sell, leaving few options for buyers.

• The number of available homes on the market in August was down by more than 9% from the previous year and a staggering 45% from pre-pandemic levels.

• Builders have been slow to provide new construction, and "NIMBYism" (Not In My Backyard) opposition in suburban communities hampers development.

• To add to the problem, entry-level homes are in short supply. During the 2000s, an average of 150,000 new entry-level housing units were built annually, but this dropped to 55,000 units after 2008.

• Economists predict that mortgage rates will stay high through 2023, and they will only decline once the central bank starts cutting rates, but they are unlikely to return to pre-pandemic lows.

• This situation keeps housing inventory low and prices high, further delaying relief for homebuyers.

A SCOOP OF HOMEOWNERSHIP

A recent study by Self, a credit-building company, sheds light on the real costs of homeownership. It considered various expenses associated with owning a home over a typical homeownership duration of 13.2 years. Here's the breakdown.

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• Start with your down payment and add closing costs, moving expenses, homeowner's insurance, private mortgage insurance (if required), property taxes, home maintenance, and utilities. For the study, they assumed a 30-year-fixed-rate mortgage at the 2022 average rate of 5.26%.

• For the average three-bedroom home valued at $355,892, the total outlay over 13.2 years amounted to around $623,290. Mortgage payments were the most substantial chunk at $270,593, followed by maintenance and repairs at $192,139. Surprisingly, utility payments surpassed the initial down payment, totaling $54,662, while the down payment was $46,266.

• Keep in mind these costs can vary by region, with Hawaiians spending the most ($1,482,229) and West Virginians spending the least ($321,194) over the same period.

• Several factors can reduce these expenses, including a larger down payment, energy-efficient appliances, alternative energy sources, and DIY repairs. Additionally, when mortgage rates eventually drop, refinancing at lower rates can significantly impact your homeownership costs.

• So, while homeownership offers stability and equity-building potential, it's essential to be financially prepared for all the expenses that come along with it.

A SCOOP OF DIVERGENCE

The housing market in the United States is showing a striking divergence, creating a tale of two markets: one red-hot at the bottom and another ice-cold at the top.

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• This division has been prompted by the surge in mortgage rates, which rose from 3% in September 2021 to 7.33% as of the latest data.

• In higher-priced housing markets like Seattle and San Francisco, upper-tier home values have dropped significantly, with declines of 10.7% and 13.4%, respectively. In contrast, lower-priced homes have seen milder decreases of just 1.5% and 4.1% in these cities.

• The driving force behind this trend is housing affordability. With many buyers priced out of the high-end market due to rising mortgage rates, they have shifted their focus to smaller, more affordable homes, keeping the lower-priced segment relatively active.

• Additionally, move-up buyers who would typically trade in lower-rate mortgages for higher ones have chosen to stay put, reducing demand for upper-tier homes and decreasing supply in the lower-tier market.

• Among the nation's largest housing markets, lower-priced homes have consistently outperformed their higher-priced counterparts, setting all-time highs in 30 out of 40 markets in July.

• This shift has also impacted regional markets, with formerly high-cost cities like San Francisco and Austin seeing overall price declines, while more affordable cities like Chicago, Cincinnati, and Kansas City are attracting increased attention from individuals and investors seeking relative affordability.

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