Consumers are facing multiple challenges as they try to make ends meet. To begin with, there is the energy shock, which is pushing up fuel and transportation costs and will soon cause an increase in food prices.
At the same time, consumers are facing an ongoing housing shortage and slowing wage growth that may turn negative as the energy shock takes its toll.
That adds up to squeeze on consumers.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe now.
Food accounts for nearly 14% of household expenses and energy accounts for 6.5% in the calculation of the consumer price index.
But shelter accounts for more than 35%, which was a big reason inflation remained stubbornly high even before the energy shock.
We can point to three reasons for the current squeeze in the housing market.
- Not enough turnover: First, there is the lack of housing turnover leading to a deficient supply as new buyers enter the market. Many homeowners are sitting on mortgages that were financed during the period of historically low rates. They have little incentive to move, which limits choices for younger buyers. In addition, too few homes have been built since the financial crisis. Overall, the market is short 4 million units that we think are necessary to meet demographic changes.
- Changing demand: Second, there was a significant change in preferences during the pandemic, with a spike in the demand for bigger single-family homes. That developed into increased demand for bigger mortgages which helped push rates higher.
- Higher interest rates: Third, interest rates have normalized after years of historically low rates. Commercial loans moved higher, increasing the risk for builders. And 30-year mortgage rates have moved from 3% in 2021 to 6.5% today. As builders face an increased cost of capital, they are less willing to take a risk. And as the housing shortage persists, the prices have increased, leading to higher risk of default and higher risk being priced into mortgages.
The mismatch in supply and demand is making housing less affordable for home buyers and renters.
The takeaway
With interest rates likely to stay where they are for the time being, and housing policies at the federal and local level unlikely to change in a significant way, we expect a general housing supply shortage to continue.
