Understanding the housing market: a look at supply and demand

During the past two years, America’s red-hot housing market left millions of people scrambling to find an affordable home to purchase or rent. There were many contributing factors: historically low interest rates, changing demographics, and the pandemic — just to name a few. Over the next several weeks we’ll take a deeper dive into how these trends are playing out nationally and here in the Triad to get a better understanding of where we are today, how we got here, and what we can expect in the not-too-distant future. WFDD’s David Ford begins with this look at supply and demand. 

To better understand what’s going on in our local housing market today, it helps to look at what’s been happening across the country on both the for-sale side and the rental side. Alex Hermann, senior research analyst at Harvard’s Joint Center for Housing Studies, says that interplay moved front and center during the pandemic as home prices rose double digits as early as December 2020 and kept climbing from there, setting new records for growth along the way.

"By the time we released our annual State of the Nation's Housing 2022 Report earlier this year home prices were rising nearly 21%," says Hermann.

He adds that what makes this pandemic-era growth unique is how widespread it’s been — by double digits in the first quarter of this year in nearly every large market in the U.S.

And he says,"Sixty-seven of those 100 large markets experienced record high appreciation rates — home price increases faster than any point since the housing boom of the mid 2000s since anytime since the 90s really."

Then came rising interest rates — compounding the home price story by eating into affordability — making home buying even more difficult for some households. Those who were once able to save up for a down payment and rely on historically low interest rates of roughly 3% were suddenly looking at almost twice that. As a result, in April of 2022, monthly mortgage payments on median priced homes assuming a downpayment of 3.5% jumped to just over $2,000 — a $600 increase in a matter of months. 

Hermann says that unprecedented heat on the for-sale side of the market also has huge implications for renters.

"The rise in home prices have prevented many moderate and even higher-income households in some markets from becoming homeowners," says Hermann. "And that means many of these households then turn to the rental market or stay in their rentals for longer and that pushes up demand for rental housing."

This unprecedented rise in home prices, coupled with interest rate bumps, have contributed to an equally unprecedented rise in rents — just over 10% last year, a new record — and they’ve yet to come down. And, Hermann says like home price increases, this too is a national phenomenon. In early 2022, rents increased year-over-year in all 150 of the nation’s large markets tracked by RealPage — a property management software corporation.

"To give you some comparison points here, just two markets had double-digit price growth at the beginning of 2021. So, the number of markets that were experiencing double-digit price growth went from just two to 116 in a year."

Now, with more moderate income and even higher earners unable to access the home ownership market — opting to rent instead — that too pushes up demand on the rental side, forcing lower income workers to compete for the limited share of rental stock. 

Housing stock hasn’t fared much better. At the end of 2020, Freddie Mac estimated the national home shortage to be roughly 4-million units. Hermann says that lack of supply funnels more and more people into a rental market that’s already bursting at the seams. 

"So you're seeing vacancies plummet," says Hermann. "Earlier this year the national rental vacancy rate fell to 5.6 and that's the lowest quarterly reading since 1984."

Fueling those high demand pressures are more millennials hitting their 30s and 40s — prime household formation years. There’s high demand for new construction, but there are shortages in labor. Add to that, supply chain backlogs, rising land prices, and development and construction costs. All of these factors affect housing availability.  

And yet rental housing construction in the U.S. is actually booming. Multifamily production earlier this year surpassed 120,000 — the highest first quarter reading since 1986. The vast majority are intended as rentals, but the high price of rent puts this increase in supply out of reach for many moderate and lower-income renters. Millions of households can no longer afford their current housing with nearly half at least moderately cost burdened. Many lower-income and households of color continued struggling to pay rent in early 2022, and with the end of government protections, evictions are fast approaching pre-pandemic levels.  

The good news? Harvard’s Joint Center for Housing Studies predicts that over the next decade, as housing supplies hopefully increase, and the current millennial desire for housing slows — demand will eventually follow suit.