Rising Prices And Competition Are Pushing Families Out Of The Housing Market
For the 4+ decades that I’ve been alive, the American Dream has always included home ownership. For many people, it’s more of an expectation than a dream. For those saving and working to get into their first home, that dream is beginning to look unattainable.
Factors Affecting Home Ownership
Shifting Away From Starter Homes
The industry as a whole is shifting further away from starter homes less than 1400 square feet. It’s no surprise considering they typically don’t offer the profits of mid-range and luxury homes. With demand so high across the board, why not build what’s most profitable?
According to floridarealtors.org, construction trends in the 1980s included 40% starter homes. In 2019, that dropped to just 7%. With fewer starter homes available, there’s more competition for them which drives prices higher and pushes some would-be homebuyers into the rental market.
Prices and Interest Rates
During the migratory shift that started during the COVID pandemic, many parts of the country saw higher than average home price increases. At one point our local newspaper reported that Polk County, Florida (conveniently nestled between Tampa and Orlando) was experiencing the 7th fastest growth in the nation. Add to that an increase in material cost and prices keep rising.
For my family, the expected value of my home shot up 68% after just 3 1/2 years of living in it. Experts warning of a housing bubble burst may be music to the ears of renters who have been saving up to buy, but there’s a catch: interest rates.
In an attempt to slow down inflation, the Fed has been raising interest rates. All indications are that they’re going to take an aggressive approach we haven’t seen since the 1990s and are at least weighing a 100-point increase—something that hasn’t happened since 1980.
That may help with inflation, but as housing prices drop, an increase in interest rates can offset them and leave monthly mortgage payments the same or even higher. That puts buyers in a position to have to save more for a downpayment in order to get an affordable monthly payment.
Buying Tip: Save to put at least 20% down to avoid paying PMI (Private Mortgage Insurance) on top of principal, interest, taxes, and home owner’s insurance.
Private Rental Businesses
The traditional landlord scenario is still in full force in the US. Private individuals often set up small businesses and rent properties to others in need of a place to live who aren’t in the buying market. According to Statista, there were nearly 44 million rental units in the US in 2021. Of those, approximately 1.7 million are single-family houses.
Many families with second homes earn some extra cash thanks to short-term rentals such as Airbnb and VRBO. For vacationers and business travelers, it’s a great way to gain some privacy, space, and features that you won’t find staying at a hotel or resort.
As that industry has grown, legitimate small businesses have popped up as families acquired multiple properties and left other jobs to focus on the short-term rental market full-time.
Some have become very innovative, pairing multiple small businesses together. Last year, we enjoyed a week-long getaway that included an Airbnb stay managed by a wife paired with a charter fishing trip run by her husband that we were able to package together. For them, it provided a good income and we had a great time. Everyone came out a winner.
It might not seem like these small businesses take up a big chunk of otherwise available real estate. However, the United States has some 660,000 Airbnb listings according to a January 4, 2022 article from stratosjets.com.
Corporate Rental Businesses
According to an April 10, 2022 article from propertymanagment.com, nearly 36% of Americans are renters, and larger corporations have been working on ways to earn a profit from that segment.
One way they’re doing it is by taking the traditional landlord business model and scaling it up big-time. Companies such as Inivation Homes buy single-family houses across the country and rent them out.
In many cases, they compete directly against individuals looking to purchase a home for their primary residence.
On the short-term rental side, even hotel chains are getting into the game. Corporations are buying single-family homes and renting them Airbnb-style. I did a quick search after getting an email from Marriott and found that they own more than 3000 homes in Florida for the purpose of short-term rentals.
The most recent trend has been housing development specifically for the purpose of creating rental-only neighborhoods. According to the Wall Street Journal (June 7, 2021), build-to-rent homes were making up 6% of new construction in mid-2021 with that expected to double by 2024.
Digging a little deeper, 2021 saw 1.6 million new housing starts and 70.4% of those were single-family homes (1.13 million). If (and that’s a big if) the rate of construction stays the same and the 12% build-to-rent prediction holds, then somewhere around 135,000 new single-family construction units would be build-to-rent in 2024.
Considering the estimated 3.8 million home shortage the country is facing, that might not seem like a big deal. Unless, of course, you’re staring at a neighborhood going up where you want to live knowing there’s no possibility you can purchase one of the homes they’re building.
So What Does That Mean For Home Ownership?
For people who want to move out of the rental market and into home ownership, today’s market is understandably frustrating. But where do we place the blame?
Material shortages cause construction delays. Material price increases cause home prices to increase. Labor shortages cause delays across every step of construction. The availability of remote work allows higher-wage earners to move into areas with lower costs of living. Higher demand for housing pushes prices higher. Businesses buying single-family homes compete for new construction and existing homes. Higher Fed rates cause higher mortgage interest rates.
In the end, it’s not so much any one factor as it is the cocktail that today’s market has served up. Unless there’s some relief, the natural progression of things may very well be that we’re watching the American Dream of home ownership dissolve for a large percentage of Americans.