Here’s a big reason home prices are not falling

Home prices continue to rise as builders struggle to keep up with demand - Photo by UnSplash +

There simply aren’t enough houses for sale

The latest housing news may be creating excitement among people who would like to buy a home. In May, both new home sales and pending home sales tumbled as buyers stayed on the sidelines, discouraged by high prices and 7% mortgage rates.

Surely that signals the start of declining home prices. Unfortunately for buyers, the median home price went up in May and that trend may continue for a while.

Here’s why: the United States still has a housing shortage and a new report from real estate marketplace Zillow clearly illustrates the reason. Despite a surge in homebuilding during the pandemic, the housing shortage increased from 4.3 million homes in 2021 to 4.5 million in 2022.

Household formation increased faster than new homes could be built. In 2022, the number of new American families increased by 1.8 million, while only 1.4 million housing units were built.

In short, it’s a matter of simple supply and demand. When the number of people who want a home increases faster than the number of homes available, prices go up. 

This balance between supply and demand got out of whack during the financial crisis and led to a housing market crash. Home prices plunged because of the wave of foreclosures that flooded the market with houses for sale.

Impact of the housing market crash of 2009

Because of this, home builders suddenly stopped building new homes and over the following decade, the number of new single-family homes was about half the annual output in the years before the crash.

The millennials, graduating from college at about that time, didn’t benefit that much from the abundance of foreclosed homes for sale because, before they were ready to buy and start families, investors swooped in and bought most of them – a trend that has only grown stronger over the last few years.

"The simple fact is there are not enough homes in this country, and that's pushing homeownership out of reach for too many families," said Orphe Divounguy, senior economist at Zillow.

Divounguy says the affordability crisis extends to renters as well, with nearly half of renter households pushed to the brink of affordability. 

“Filling the housing shortage is the long-term answer to making housing more affordable,” Divounguy said. “We are in a big hole, and it is going to take more than the status quo to dig ourselves out of it.

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