Another sign of the topsy-turvy housing market: Existing home prices broke records this summer at the same time that inventory increased to the highest levels in more than four years. While economists believe the increased supply would eventually bring down prices, it just shows how unusual the market is at the moment.
One the biggest issues facing the market remains the supply of homes, said Robert Frick, corporate economist for Navy Federal Credit Union. Specifically, the market needs more affordable, entry-level homes where homebuyers can get their start and build equity on the first rung of the homebuying ladder.
“It’s not just building homes, it’s building affordable homes to get people started on that progression,” Frick said.
Frick spoke to Scotsman Guide about where he sees the current housing market. He also talked about what he thinks needs to be done to get out of this situation and how interest rate cuts could actually worsen the problem.
What do you make of the current housing market?
It’s frozen. I believe that housing has been in crisis for a few years and things haven’t gotten any better this year. You have to look at the causes of the crisis and the main cause is that after the real estate bubble burst, during the 2010s, there was very little housing built and what was built tended to be more expensive.
By our estimates, and they jibe with a lot of other agencies estimates, we’re at least 4 million houses short from where we should be. That’s the reason why housing is so expensive. Because there’s low supply now.
How do you fix that?
I’ve been saying for a while that the government needs to intervene, and I saw that Treasury Secretary (Janet Yellen said in June) that they were going to start implementing a program to build houses.
The Biden administration said that they were planning on building 2 million entry-level houses. I’m not going to pass judgment on that program. We don’t have enough details about it yet, but that’s the solution is we need more housing.
Do you expect the Fed to cut rates this year enough that it matters?
I think the Fed will cut rates this year once, possibly twice. Does it matter? Not really. In fact, there is the theory, which I happen to subscribe to, that cutting rates will probably increase demand, which could push up home prices.
Isn’t housing inventory finally starting to grow, at least in some markets?
Not nearly enough. In some markets, yes. There was an interesting story about Minneapolis and the building that they’ve done there and how rents have gone down. The same story did a correlation between Midwestern cities and how those that built more units had lower shelter costs. That’s absolutely true. That’s the issue here. It’s definitely by city. It’s definitely by state and definitely by region. Overall the situation does not look to be getting better anytime soon.
This is something that you noted recently — how surprised are you that new homes cost less than the existing ones?
The streams have crossed, which shows just how unusual, and contorted, the housing market is. The fact that builders are building smaller homes and offering incentives, and there’s tremendous inventory there because people can’t afford to buy them.
Builders are doing their best to build homes that people can afford. At the same time, existing home prices have been bid up so much that an existing median price home now costs more than a new median home median, which is totally bizarre and really reflects how unusual the market is.
Has that happened in the past?
Not that I could find. I’m not sure that it has never happened, but it certainly hasn’t happened in a long, long time.
What do you think will happen with home prices in the foreseeable future? How do we get out of this predicament?
I’ve been saying all along that housing prices are going to continue going up. That isn’t my wish, that’s just what I’ve seen. I don’t see anything that’s going to reverse that. I can see possibly that the rate of increase will slow, but it’s hard for me to see without a recession that home prices will do anything but rise.
You don’t think that they’ll stay flat for a while?
I think the greater probability is, with rates coming down, that home prices will bid up even higher.
Anything that could happen in the next year that would change the housing outlook?
Again, the root cause is supply and that’s not going to change significantly in the next year. The things that could change are a recession, which none of us want, and some sort a weakening of the jobs market or other economic weakening that would cause the Fed to decrease rates quickly.
If that happens, that could essentially unlock purchasing, but I don’t think it’s going to affect home prices, at least not that much. At the very beginning of the COVID recession, there were a lot of predictions that home prices were going to plummet. We never saw that. We always saw it as a supply situation and the supply situation has worsened.
