With the benefit of hindsight, we now know the exact moment America's housing market turned upside down.Arif Qazi / InsiderIf you don't already own a home, you're going to be screwed for years to come
Attempting to time the housing market is a foolish pursuit. Sure, there are heaps of data, forecasts, and market experts who can offer theories on where home prices or borrowing rates are headed. But no amount of tea-leaf reading can spare you from this harsh reality: Homebuying is ultimately a coin toss. If you're very lucky, you buy a home right before prices boom. If you're not so fortunate, you pony up the cash just in time for the bubble to burst.
While these breaking points are nearly impossible to see in advance, they're often glaring in hindsight. Perhaps the most shocking "before and after" for the housing market in recent memory — the moment when the fortunes of homebuyers diverged, creating what one expert called a "housing economy of 'haves' and 'have-nots'" — came in July 2020. That's when it became clear that a wave of house-hungry millennials and space-starved remote workers were turning the housing market's initial pandemic slump into a full-blown frenzy.
The differences between those who bought homes before and after that turning point are staggering. People who got in before things went haywire were able to dodge skyrocketing home prices, lock in record-low mortgage rates, and stack hundreds of thousands of dollars in home equity over the past few years. Meanwhile, people left on the sidelines have watched their rent costs eat into their down-payment nest eggs, median home prices soar by 30%, mortgage rates shoot back up, and the pool of available homes shrink to the lowest levels in recent history.
The result is a housing market that's fundamentally out of whack. With each passing month, more millennials, and now Gen Zers, reach the points in their lives where they feel the urge to settle down and buy a home. Yet the number of available homes remains shockingly low, especially during what would normally be a busy spring selling season. On the horizon, there's no flood of new homes that could significantly ease the housing crunch. And homeowners have little incentive to move, since doing so would mean giving up the comfortably low mortgage rates that guarantee them manageable home payments for decades to come.
The housing market has changed for good — and with the benefit of time-earned wisdom, we can pinpoint the moment it entered a new era. If July 2020 was the make-or-break moment for the market, we may now be seeing the crystallized "new normal": a fraught landscape defined by a scarcity of available homes, borrowing rates that have sharply rebounded from their historic lows, and homeowners who feel locked in by the deals they scored earlier in the pandemic. Call it the Housing Ice Age.
An upside-down housing marketWhile the transformation may have been triggered by a once-in-a-generation public-health emergency, Mike Simonsen, the president of the housing-data firm Altos Research, told me, the seeds of our upside-down housing market were planted over a decade ago. Since the housing crash of 2008, builders' reluctance to add to the supply of homes, combined with a gradually cresting wave of millennial first-time buyers, created a combustible scenario.
"We were already at record-low inventory when we started the pandemic, then the pandemic just accelerated all of these things," Simonsen said.
Two big things happened during the initial response to the pandemic that launched the housing market past the point of no return. First, borrowing rates hit historic lows as the Federal Reserve attempted to stimulate the economy. This shift allowed more people to get access to mortgages and dramatically reset buyers' expectations in ways that will reverberate for years. Second, demand for homes surged because of the widespread adoption of remote work and the sudden urge people felt for more space. The chaos pulled forward years of homebuying activity, creating a rush for homes that seriously warped the market. Both factors have propelled competition in the housing market to new heights and made it challenging for would-be buyers to find their footing.
When that fateful July arrived in the pandemic's first year, homes were selling quicker than they had in any month since the National Association of Realtors began collecting data in 2011, prompting the organization to proclaim a "V-shaped housing-market recovery." First-time homebuyers were jumping into the market with gusto, accounting for 34% of home purchases. The median home price in the third quarter of that year jumped to $337,500, up 5% from the previous quarter, kicking off a two-year streak of massive price increases. Fueling this sudden shift was collapsing mortgage rates, which, for the typical 30-year loan, fell below 3% for the first time ever that month.
"I might say July is the turning point, where you actually saw that sharp increase in demand driven by the low-interest-rate environment and the remote-work phenomenon," Cristian deRitis, the deputy chief economist at Moody's Analytics, told me.
As the dust settles after a hectic few years, it's becoming clear which of the pandemic distortions are going to stick around as long-term trends. Homebuyers and real-estate agents who grew accustomed to the market running red hot during the first couple of years of the pandemic are confronting the challenges that come with a much-chillier environment — higher borrowing rates, fewer transactions, and a dearth of homes that ensures competition for listings remains fierce.
The most striking feature of this new housing market is the historic lack of homes available for sale. Part of this is due to pre-COVID-19 decisions: The hype around income-earning investment homes has over the past decade led to roughly 8 million homes being taken out of the resale market and turned into investment properties, Altos Research estimates. Even still, the severity of the inventory crunch proves something else has shifted.
A busy spring selling season, when inventory typically spikes as people gear up to move in the summer, hasn't materialized this year. Typically, you'd expect to see about 1 million single-family homes on the market around this time of year, Simonsen told me — today there are just over 400,000. In March, roughly 30% fewer properties hit the market compared with pre-pandemic norms, Black Knight, a mortgage-software and -data provider, reported. And in April, existing home sales were down a whopping 23% from last year, Realtor.com found. The number of new listings that hit the market in March and April was essentially on par with the low levels in 2020, when the country was in the throes of the first pandemic restrictions, Danielle Hale, the chief economist at Realtor.com, told me.
"If you had told us in 2019 or 2018 that we were only going to have a little over half a million homes on the market in April, no one would have believed you," Hale said. "It's so vastly different that it's probably hard for most people to comprehend."
Many would-be sellers are content to stay put because they've locked in mortgage rates well below what they could get if they got a new loan today. After rates bottomed in late 2021, the Federal Reserve's interest-rate hikes — designed to fight inflation that was caused in part by the housing-market surge — have sent borrowing costs soaring. The typical rate for a 30-year mortgage now stands at around 6.4%, according to Freddie Mac, about the highest levels since the Great Recession. This has kept people from putting their houses on the market and suppressed overall inventory levels. Roughly 86% of US homeowners with mortgages have an interest rate of 5% or lower, while half of all mortgages have an interest rate of 3.5% or lower, well below today's level, according to Black Knight. And roughly three in five homeowners have moved just within the past four years, meaning that even if rates do come down, many mortgage holders will be in no hurry to move, according to data from Redfin.
"The high-interest-rate environment is locking out a lot of would-be first-time homebuyers. It's just not affordable at these levels for them, given their incomes," deRitis told me. "But even more frustrating, perhaps, is for buyers who are qualified, who even have the cash available — there's just very limited existing home inventory. Even if they want to buy, they just can't."
The lucky and unluckyThis new Ice Age will have profound effects that are likely to linger for decades. Those who bought homes before the market's turning point have watched their wealth skyrocket over the past several years. As of March, the typical homeowner with a mortgage had about $185,102 in tappable equity — the amount they can borrow against while keeping a 20% stake in their home — according to Black Knight. That's a 54% increase from the same point in 2020. In the two years ending in October, US homeowners gained a whopping $9 trillion in home equity, according to the Federal Reserve.
Renters have seen none of those wealth gains. In fact, they're more burdened by rent than ever before. Last year, the typical American household needed to fork over more than 30% of its income to rent an average-priced apartment, according to Moody's, the first time since the firm began tracking the data 25 years ago that the rent-to-income ratio crossed that threshold.
For the people who can wade into the market today, there's ample evidence that they're getting short-changed. In March 2020, $300,000 could have gotten you a roughly 2,000-square-foot home, according to data on average prices per square foot from Realtor.com. Today, that same dollar amount would get you a 1,400-square-foot property. So in just three years, the same amount of money gets a buyer 30% less house. The NAR's housing-affordability index has plummeted since the start of the pandemic, falling from about 180 to just 98 as of March.
Some aspects of the pandemic-era housing market that once seemed "odd" are increasingly becoming new norms. Buyers are still bidding quickly on the homes they want — more than 20% of homes are going under contract almost immediately, Altos Research found. In 2022, all-cash purchases accounted for more than one-third of all single-family-home and condo sales, a nine-year high, according to Attom Data Solutions, a real-estate-data firm.
For those who missed out on the past several years of wealth building, the long-term effects could be devastating. We already know that millennials are living with their parents later, delaying typical life milestones such as getting married or having children, and having to wait longer to purchase homes. As a result, they have less wealth than their predecessors did, even though their earnings have caught up to those of previous generations. The steep rise in mortgage rates last year ensured that there would be a decadeslong gap between those who secured cheap rates earlier in the pandemic and those who will be forced to contend with all kinds of rising housing costs in the coming years.
"The thing that I think is maybe not changing is the fact that we have people who are in homes now who are locked in for 30 years," Simonsen told me. "If I've got a 30-year mortgage, I don't ever have to sell that house. Those are generational changes."
James Rodriguez is a senior reporter for Insider.
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