Is there a housing shortage in the US? | Will a recession impact the mortgage rate?

July 19, 2022

Is there a housing shortage in the US? | Will a recession impact the mortgage rate?

I keep on hearing people ask, “Is there, or is there not a housing shortage?” and “If we hit a recession in the US, what happens to mortgage rates?”

I know the news has been crazy lately, and I understand why people are anxious. However, let’s not freak out and let our emotions get ahead of us. Instead, let’s look at the facts—the data—and try to answer these questions objectively. 

Remember, “Facts, not feelings. Data over drama.” Let’s dive right into it.

Interest rates on mortgage

Let’s talk about interest rates. What I keep on hearing is that, if we are heading into a recession—which looks likely—what happens to real estate? What will happen to mortgage interest rates?

I’ve been in the real estate industry for 20 years, and based on experience, we can always look at previous data to see trends.

In an article I read last week, the Wall Street Journal said, “Growing fears of a recession in the U.S. stand to further push down mortgage rates as investors pile into U.S. Treasury, widely seen as safe investments during times of economic uncertainty. Mortgage rates are closely tied to yields on the benchmark 10-year U.S. Treasury, which fell to their lowest level in more than a month this week. Yields fall when prices rise.”

So, what happens to interest rates during a recession? According to Investopedia,Interest rates fall in a recession in a reflection of reduced credit demand, increased savings and a flight to safety into Treasuries. The decline also anticipates a central bank's likely response to the economic downturn, which can include cuts in short-term interest rates and large scale asset purchases of debt securities with extended maturities.”

If we dive deeper into this, guess what else you’ll see? You also see that during a recession, real estate typically goes up. In four out of the last six recessions, real estate went up, except for the Gulf War recession of 1991 (when real estate dipped minimally, by just over 1%), and the Great Recession of 2008, where real estate took a massive hit due to lending practices then. Everything was fundamentally broken there when it came to the stock market investing in mortgages that didn’t hold any water.

Is there a housing shortage in the US?

Now, let’s talk about the inventory of homes for sale. There’s been a lot of debate about whether there really is a housing shortage in the US, and Dave Ramsey has a spot in that discourse.

On his The Ramsey Show YouTube channel, he live-streamed a video on July 14, and this is what Dave says:

“Now, the current supply is about half of what it was in 2007. ‘Dave, it’s just like 2007. It’s just like 2008. The market’s gonna crash. It’s too high. It’s too high, it’s gonna go down!’ Well, there are 3 million houses, almost 4 million houses for sale in 2007, and there are about 800,000 houses for sale right now.”

According to NAR’s existing homes for sale stats from 2019 to May 2022, we went from almost 1.4 million homes for sale in 2019 (3.9 months of supply) to 1.16 million houses in May 2022 (2.6 months of supply).

That number consists of both the active listings on the MLS and new construction that is available to purchase right now. But, we don’t take into consideration the homes that people can just no longer afford. That’s reality; that’s what we’re looking at. 

There’s an affordability issue here. You only have a certain number of people that can buy—now that interest rates have slightly gone up—but the challenge is that there are not enough entry-level homes that prospective home buyers can afford. That’s what keeps driving the prices in some areas.

There’s another great article by NPR called “There's a massive housing shortage across the U.S. Here's how bad it is where you live.”

The article says, “Home prices are up more than 30% over the past couple of years, making homeownership unaffordable for millions of Americans. Rents are rising sharply too. The biggest culprit is this historic housing shortage. Strong demand and low supply mean higher prices. Part of the problem goes back to the last housing crash, which happened around 2008. After that, many homebuilders went out of business, and economists say we didn't build enough for a decade.”

They also provided a table showing, city by city, where the shortages are and by how much we’re short.

Rank one on the list is Oxnard-Thousand Oaks-Ventura, California, where I happen to be from, and according to NPR, there has been a shortage in this area from 2012 to 2014 that only worsened from 2017 to 2019 (11% shortage; around 31,310 units short).

What do you think happened from 2020 to 2022, when houses were selling in a snap and interest rates were incredibly low? It created a more massive shortage, and that’s what we’ve seen.

Other areas on the list and how much the shortage is in those areas are as follows:

The list goes on for 16 pages, and each page has about 20 cities to show you how far they think we’re behind.

In some cases, like in Los Angeles, NPR quotes Mike Kingsella, the CEO of Up for Growth, as saying, “In Los Angeles, for instance, which is the most underproduced metro in the country, it's lacking 8.4% — nearly 400,000 homes missing across the region.”

NPR says, “On this economists agree: We need more housing. …There is some debate about just how bad the shortage is in terms of the number of homes the U.S. needs.” 

They also quote Mark Zandi, Chief Economist at Moody’s Analytics. He estimates that the US is short of around 1.6 million homes:

“It's very difficult to know precisely what the shortage is… But the bottom line is, no matter what the estimate is, it's a lot of homes that we're undersupplied,” Zandi says.

As you dive into this more, you start reading that there is an undersupply as well, more specifically in areas that have Latinos, Blacks, and places that you don’t see typical homeowners living. Housing supply is more challenging in those areas. The government and city planning are looking at what they can do to remedy that, but we are not seeing a turnaround any time soon.

Why? Have you seen rents lately, with inflation at 9.1%?

Final Thoughts

A lot of people are saying that real estate is the worst thing you can buy through inflation, but historically speaking, I think not. If you look at history, not just 2007 to 2009, but housing market history that looks similar to where we are right now: late 70s to 80s.

What is happening right now is more similar to the 80s housing market. Also, if we look at interest rates for mortgages with what has happened in the past during a recession, it doesn’t make sense to reach 7% to 8%, and in fact, it has dropped a little bit.

So, pay attention to what’s happening. Read more facts; don’t rely on just feelings. Read more data.

As of now, there is no housing crash. Can it change? Of course, the world can go to hell and all of a sudden there is a housing crash. But, as of now, where we’re heading, it doesn’t look like it.

Also, one of my commenters during this live stream, Kirk, says, “Inflation destroys debt.” He makes a good point that we can all keep in mind.