In today’s unaffordable housing market, high mortgage rates just one part of the problem. Prospective home buyers also face a long run lack of housing.

Over a decade of underbuilding has left the country with a deficit of nearly 1.5 million new homes. At the same time, current homeowners who are holding on to their low mortgage payments are freezing inventory for sale in the so-called “rate-lock effect.”

When pent-up demand exceeds supply – in this case, for new and existing homes – prices rise.

In 2023, active housing inventory levels hit an all-time high, but experts see the trend slowly reversing. “Better availability of homes for sale will provide a greater balance between buyers and sellers, meaning fewer bidding wars and price increases,” he said. Selma Heppchief economist at CoreLogic.

However, even a an estimated 11.7% increase this year, the number of homes for sale will remain behind the pre-pandemic level of 23%, according to Realtor.com. Due to a long-term shortage in the supply of homes, conditions are likely to remain challenging for home buyers well beyond 2025.

“Inventory will increase, but supply is still below historical levels,” he said Lisa Sturtevantchief economist at Bright MLS, a multiple listing service operating in the mid-Atlantic.

Other variables are also at play, including Federal Reserve projections for a small cut in interest and The economic policies of President-elect Donald Trumpwhich is expected to be inflationary and possibly drag on the housing market recovery.

Bottom line, any meaningful increase in housing inventory requires a surge in for-sale listings and a significant increase in new construction. Both scenarios will depend on low inflation and sustained interest rates Fed rate cut to reduce the cost of borrowing for consumers and businesses. Here’s why.

Where are all the houses?

The COVID-19 pandemic is a clear change for the housing market, and not only because of the scarcity of building materials from disrupted supply chains. As the lockdowns were enforced, demand for housing soared as families moved for more space and millions took advantage of the record-low mortgage rates about 2-3%.

The result is a white hot seller’s market, with homes in foreclosure and prices rising rapidly. Millions of homeowners have done the same refinance and lock in bargain ratesgiving them more incentive to stay.

Today, 84% of homeowners are now have an interest rate of less than 6%and average mortgage Prices are not expected to drop back to sub-6% levels by 2025. If homeowners list their properties and move now, they’ll have a higher rate on a new home loan — and a more expensive monthly payment.

For households that couldn’t afford to sell their properties in recent years, the decision to move may be less about mortgage payments and more about lifestyle changes, he said. Ali Lobochief economist at Zonda, a home construction data company. Big life decisions, such as changing jobs, having children or getting divorced can prompt many sellers. abandon their attractive interest in 2025.

Are there regions seeing more inventory?

Housing supply has gradually rebounded over the past few years, although some regions have recovered more quickly than others.

For example, the states with the lowest levels of supply are concentrated in and around the Midwest and Northeast, where there is less available land to build on and the rate-lock effect is stronger. But in the South and West, where new home construction is most prevalent, housing supply is near or even above pre-pandemic levels.

In places where new construction much less, supply will depend on whether mortgage rates fall and provide enough incentive to keep sellers away. Sub-6% rates aren’t low enough to completely break the rate-locking effect, but the gradual easing of borrowing costs will at least help loosen it.

However, if mortgage rates drop to record lows again (in the context of a major economic crisis), buyers will likely flood the market to compete with limited inventory, which could lead to to increase house prices.

In order to improve affordability, housing prices and mortgage interest rates better move toward equilibrium at the same pace.

Is there an increase in new construction?

In the lead up to the financial crisis of 2007, new home construction increasingpeaking in early 2006. By 2009, new construction had dropped by more than 125%. Today, housing starts are nearly 50% below pre-Great Recession levels.

In addition, the builders primarily build the larger, more expensive single-family homes and multifamily housing to address changing buyer demographics and greater incomes. This shift has led to a decline in the construction of starter homes, for example, smaller (typically 1,500 square feet or less) affordable properties that help low-income families access ownership. at home.

“We’ve been witnessing the death of the startup home for the better part of a decade,” he said Brittany Webbdirector of research at the National Housing Conference. This makes it difficult especially for first-time home buyers to find affordable homes in the areas they want to live.

In the past year, homebuilders have slowly begun to transition building small houses with lower price tags. Newly built homes tend to be more expensive than existing ones, but experts see the price gap narrowing by 2025. However, much depends on supply chains, the cost of materials and interest rates.

“Lower rates are likely to result in more favorable lending conditions and lower construction costs for homebuilders, making new projects more profitable and encouraging more building the house,” said. Odeta Khushideputy chief economist at First American Financial Corporation.

Will the housing market inventory change in 2025?

There is a lot of uncertainty around Trump proposed economic policies and the extent to which it will affect the housing market and monetary policy in 2025.

Other campaign proposals, such as easing land use regulations, could spur development and boost housing inventory. Other proposals, including tariffs and tax cuts, could cause inflation to rise and prevent the Fed from making further rate cuts.

Higher tariffs, especially on timber, are a big concern for builders, he said Robert Dietzchief economist of the National Association of Homebuilders. Rising construction costs can disrupt home construction and drive up the prices of newly built homes.

Furthermore, if interest rates remain highhome builders are less likely to rely on construction and development loans to finance projects, and current homeowners may be less likely to list their homes.

However, many have expressed enthusiasm for Trump’s deregulation proposals and his promise to sell federal land to developers for home construction. “Homebuilders are optimistic about the expansion of the 2017 tax reform and efforts to reduce regulatory burdens at all levels of government,” Dietz said.

State and local governments should also loosen their zoning and land use laws to make it easier and cheaper to build homes. That could take a long time, especially in areas where residents oppose further development.

How to navigate today’s housing shortage

Prospective buyers can do nothing about the above mortgage payments tying the current inventory or the pace of homebuilding. But there are ways you can find a home within your budgeteven if inventory is tight.

• Broaden your home search: Housing inventory varies by state and metropolitan area. So even if you’re set on putting down roots in a specific location, it’s worth it keep an open mind. Lesser known areas or submarkets bordering urban centers may offer a wider selection that better suits your budget and preferences.

• Think fixer-uppers: If you’re comfortable with the potential cost and duration of repairs, fixer-uppers or older homes tend to offer cheaper asking price. You will also benefit from less competition and/or bidding wars that are common with turnkey properties.

• Find something new ESTABLISHING: If you live in an area where there’s a lot of new construction going on — like the South or Western regions where there’s more available land to develop and friendlier zoning laws — you can buy a new house for a price similar to or lower than a pre-owned one. To attract buyers, many builders offer all kinds of incentives, including buy mortgage-ratediscounted prices or closing cost assistance.

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