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Writer's pictureJoseph Penner
Dec 10, 20243 min read

Making sense of the current housing market

By Joseph Penner, Founder & CEO, Hill Street Realty


One of the most repeated terms in the media and politics is the “Need for Affordable Housing.” While it makes for a good soundbite, government intervention in the housing market is complex. History is filled with unintended consequences resulting from poorly designed policy decisions. 


According to the Pew Research Center, 69% of Americans are "very concerned" about housing costs, an increase from 61% in 2023.[1] The report also notes that the FHFA housing price index rose by 57.8% between July 2019 and July 2024. In addition to rising home prices, there have been significant increases in the cost of property tax, insurance, and utilities. Finally, mortgage rates have increased as interest rates have come off their historical lows and begun to normalize. 


These dynamics have strongly supported the rental market, even amidst the record number of multifamily unit deliveries. As shown in the graph below, which covers the period from January 1968 to September 2024, the number of completed multifamily buildings (those with five or more units) has reached levels not observed since the 1970s. 



This increase in supply should have resulted in a more significant increase in the vacancy factor, but as you can see from the second graph, using U.S. Census Data for the same period, multifamily vacancies nationwide have remained relatively stable during this time of historically high new deliveries. 


In fact, the implied increase in demand for rentals nationwide is a clear signal that the nationwide housing market is complicated and impacted by many factors.  


Overall, the affordability of housing is largely determined by a well-functioning housing market, where supply and demand are relatively balanced. One of the many unintended consequences of the decade of interest rate manipulation by Western governments has been the abundance of very low, fixed-rate mortgages. While these low rates benefit current homeowners, they can also create a financial trap, as many homeowners cannot afford to purchase their own homes at today's prices and interest rates.  According to the National Mortgage Database, the average interest rate on all outstanding first mortgage loans in the U.S. was 4.2% at the end of the second quarter of 2024.[2]


This has significantly decreased the supply of homes for sale, with approximately 900,000 home listings in August 2024 compared to 1,325,000, 1,285,000, and 1,235,000 in August 2017, 2018, and 2019, respectively.[3]


While this has reduced the supply of existing homes for sale, new construction also faces serious headwinds. These challenges stem from rising construction costs, which include materials, labor, and financing. Short-term interest rates have been higher than long-term rates for over two years. All construction lending is short-term, floating in nature, and priced off the short end of the interest rate curve.  


Finally, in the areas with the most unaffordable housing markets, local and state regulations continue to delay developers' ability to produce much-needed housing, creating a long-term chokehold on supply. As expected, USA Today reported that California has the top five least affordable housing markets in the USA.[4]


The demand side of the equation has also had major shifts over the past decade, with significant growth in the number of homes purchased by investors and not end users. Realtor.com reports that the first quarter of 2024 witnessed purchases by investors rising to an all-time high of almost 15%.[5]


The combination of these factors has led to the worst housing affordability conditions in decades, as shown in the graph below. 



It is clear that there is no quick fix for the current situation, and any governmental action needs to be well thought out. The unintended consequences of poorly designed policies could prolong the situation.  


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