The American City Not Building Enough Homes

The U.S. residential real estate market has been through extreme changes that have been rare since WWII. Prices exploded upward in the last two years, triggered by low mortgage rates and a preference for living outside large cities. Very recently, there has been a shockingly fast drop in demand and price, based largely on mortgage rates that have doubled in less than a year. Home builders have started to slow or suspend activity as mortgage rates kill demand for new houses. The worst case of this problem is the New York City metro area. A recent survey shows that only one new home building permit was issued for every 38 new jobs.
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The National Association of Realtors keeps a Housing Shortage Tracker. The yardstick used for the calculation is new family home permits issued compared to new jobs in 178 metro areas. The historic average nationwide is one permit for every two new jobs.

For the 12-month period that ended in July, there were 497,000 new jobs in the New York-Newark-Jersey City metro. There were 13,229 new family home permits issued in the same period. As part of a review of the information, NAR’s senior economist and director of real estate research told The Hill, “Keep in mind that as more people enter back into the workplace, demand for housing is expected to remain strong as they set their sights on homeownership.”

Unfortunately, many of the people who want a new home will not be able to afford one. And cities like New York, with extremely high median home values, will represent an even larger challenge to potential home buyers.

Mortgage rates were about 3% for a 30-year fixed-rate mortgage a year ago. That figure is just below 7% today, driven by interest rate increases put into effect by the Federal Reserve to cool inflation. In the last few months, the monthly mortgage payment for new loans has risen hundreds if not thousands of dollars a month due to this rise.

Unfortunately, for home buyers, things will need to get worse before they get better. The Federal Reserve will need to try to bring down inflation with a series of rate hikes that will continue into 2023. Economic activity will slow considerably, and recession is almost certain. People will lose jobs and fall out of the home-buying market. Demand for homes will slacken.

However, the picture is not perfect for an improving housing market from the standpoint of buyers of builders. High interest rates make home construction more expensive. Homebuilders face high costs of borrowing money for construction. Interest rates will eventually need to drop to move construction activity higher.
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The variables for the economic models of home prices are dizzying, making a forecast about the housing market’s future impossible. For the time being, there will be a home shortage in New York that will last for years.