The U.S. Housing Crisis, Explained

Other than the early 1900s, when home buyers had to come up with a 50% down payment and pay the entire mortgage off in five years, it's hard to remember a time in U.S. history when it was tougher to buy a home. We are in no way comparing today's housing crisis to 2008, when the entire market seemed to be sucked down the tubes simultaneously. But for those hoping to buy a home, it feels like a crisis just the same.

How did we arrive in a place where the average household cannot afford what was once considered an average home?

Just as it's rarely one thing that leads to a romantic breakup, many factors have lead us to the current housing crisis.

Global pandemic

For most of us, COVID-19 was the first time we experienced a pandemic, a virus that killed nearly 7 million people worldwide. It's natural that so few people knew how to deal with such an event. Governments were unsure of what to do, local officials were clueless, and everyday citizens anxiously awaited direction.

Those who were able were asked to work from home to minimize the number of COVID-19 cases. And once some of those folks became accustomed to working from home, they realized they could live wherever they wanted.

But the pandemic impacted housing prices in several other ways too, including supply and demand and material and labor shortages.

High demand

Workers in high cost-of-living areas could move to less expensive cities, buy homes, and settle down. A steady stream of coastal residents headed for the less-expensive interior of the country, and suddenly, Midwestern and Southern cities were in demand. Home prices soared as competition heated up. Buyers were desperate enough to waive important contingencies and even take money from their retirement accounts to increase their offers.

At the same time, the Federal Reserve wanted to keep the economy humming along, so it lowered the prime rate, which in turn, dropped the mortgage rates to a record low. Those low interest rates drove even more home buyers into the market, and competition became scorching hot.

Low inventory

There were two groups squaring off: Those who wanted to reinvent their lives in a new area and those who did not want to sell their homes in the middle of a pandemic and fight to purchase another property.

Unfortunately for those in the market, there were far more buyers than sellers. Inventory in some areas was nearly non-existent, and homes that did sell were often under contract within hours.

The law of supply and demand came into play as the scarcity of homes continued to price many out of the market. Any time there's a shortage of anything, you can count on the price increasing.

Supply chain issues

One of the eeriest parts of the pandemic was the sense that everything shut down around the same time, and it had. Businesses across the globe were ordered to close to slow the spread of the virus. As a result, small local businesses could not remain open, and once-thriving areas looked like ghost towns.

Those shuttered businesses had once supplied the building industry with the materials they needed to construct new homes, but now, production had come to a halt.

By the time August 2021 rolled around and builders had returned to the job site, building material prices had risen 19.4% year over year. Again, it was a matter of supply and demand.

It would take months for manufacturers to get back to 100% production and months for shipping companies to catch up on deliveries.

Builders who spent more on lumber and other materials were forced to pass the higher cost along to buyers.

Employment issues

Another expense passed on to consumers was the cost of labor. Simply put, fewer construction workers were available as the pandemic began to slow, and it became more expensive to employ those who were available.

Between the labor and materials shortage, building a home began to take more time than it had pre-pandemic. The longer it took to build a house, the fewer homes were available.

Interest rate increases

The Federal Reserve is facing an economy that is now too hard to maintain. While the Fed had been forced to lower interest rates two years earlier, the rates now had to be ratcheted up to slow spending and cool inflation. It has been a slow, painful process, and mortgage rates have more than doubled.

Today's mortgage rates are still below the national historic average. However, it is impossible for many households to take on a mortgage once both inflated home prices and a rising interest rate are involved.

Household formations

A rarely discussed issue is the role newly formed household formations have played. In 2022, the U.S. experienced the highest level since 2012, with 2.06 million new households coming together.

Whether the new households consist of a newly married couple, grandparents moving into a guest room, or a group of adults splitting the cost of housing, new households put pressure on a building industry that's already miles behind where it needs to be to satisfy demand.

Zoning laws

Local zoning laws are often outdated and do nothing to address the housing shortage in the country. For example, some zoning laws require a neighborhood lot to consist of one single-family home, even if it could easily accommodate two or more. Large lots are nice, but when enough areas strictly limit the number of allowed housing units, it further widens the housing gap.

Zoning laws are also responsible for the number of areas that don't allow construction of multi-family properties like apartments, condos, townhouses, or duplexes. New multi-family housing units would not only offer more buying options, but more units would also drive down the cost of rent as landlords compete for new tenants.

Aging in place

There was a time when a person "of a certain age" sold their home and downsized or moved into a retirement community. In fact, the Silent Generation (those born before 1946) were pretty dependable when it came to selling later in life and either downsizing, moving in with family, or into an assisted-living facility.

Given the high cost of buying a new home and the exorbitant cost of assisted-living facilities, it makes sense that today's older adults are choosing to stay put, many in homes they've paid off.

The issue is that, historically, enough of those homes have come on the market to give younger buyers a great number of options. Now that fewer are choosing to move, it's one more factor adding to housing woes.

Competition from investors

It's a David versus Goliath situation when it comes to the average household competing with well-funded investors. According to real estate investment firm Norada, investors purchased a record number of homes as competition and prices heated up. If a buyer has their heart set on a specific home, but an investment firm decides it would make a great addition to its rental property portfolio, the investment firm will likely win a bidding war.

In some parts of the country, it's foreign investors buying homes for their children to live in while studying in the U.S. or simply to add to their portfolios. From April 2021 to March 2022, international buyers purchased $59 billion worth of U.S. real estate, up 8.5% from the previous year.

There are many factors responsible for the housing crisis

If one single issue led to the current housing crisis, it would be much easier to fix. Instead, we've experienced a host of issues, each needing its own solution.

Ideally, with time, low inventory will become a thing of the past, and regular people can get back out and find the home of their dreams at a price they can afford.