Say you and I are crawling through the hot desert, penniless and dying of thirst. We have a strong demand for a sip of water.
Next, we are lucky enough to find a trekker with a water bottle. Ah! Demand has just met supply. A market is about to be born and we will live, right?
No. They only charge a cent for a drink. We can “request” it as much as we want. But since we’re penniless, we’re dead. We lacked the ability to pay.
Now that the average monthly mortgage payment is 56% higher than a year ago due to higher house prices and higher interest rates, many renters who wanted to buy a home feel like the dehydrated desert crawler and penniless.
They can claim to own a home as much as they want, but they don’t have the ability to pay. Today’s would-be first-time homeowner is in worse shape than the Texas power grid.
The supply of US housing remains so scarce that we need the current available inventory units of ~ 600,000 to increase to 1.5 million (graph). This means that we need a 250 percent increase in supply just to achieve a balance between supply and demand.
Last year on NTD Television and my podcast, I said that house prices should continue to rise this year. But if more would-be buyers don’t have the ability to pay, what should continue to sustain these higher and higher house prices that I expect will continue?
Higher Mortgage Rates
Let’s go now. In what time and twisted and upside-down place would higher rates be related to higher property prices? Today, and right where you are as you read this now. Prices have risen along with interest rates over the past 18 months.
Let’s take a look at recent history. Mortgage rates have risen substantially nine times since 1994. House prices have risen seven times out of nine (graph). Are you surprised?
While there is broad disagreement about the state of the economy today, rate hikes are, historically, often a confirmation that the economy is strong. Conversely, when the Federal Reserve lowers rates, it often means the economy is doing badly and needs support. People make home buying decisions based primarily on the stability of their job and income, not the mortgage interest rate.
But homebuilders expect these higher rates to slow down buyers’ appetites. This plunged the confidence and sentiment of home builders. Builders build less. This provides even more.
Existing homeowners are reluctant to sell because their replacement home would have a higher rate. This means that their property often doesn’t hit the market at all, further limiting supply.
The most populous age cohort in America is between 28 and 34 years old. It is the first age of “home education”.
When a 51-year-old buys a house, he usually sells the old one. This balances supply and demand. But you see, when these over 29-year-olds buy a house, they often don’t have one to sell. Their transaction absorbs one supply unit.
Strength of the existing homeowner
A slump in house prices is fueled by troubled homeowners who can’t pay the mortgage and have no equity, so they walk away (like in 2008). Today, 40 percent of homeowners don’t have a mortgage.
Among mortgage holders, the national loan-to-value ratio is 30 percent. For example, that’s a $ 500,000 home with a $ 150,000 mortgage. The default rate on residential mortgages continues to fall (graph).
The Fed factor
Fed rate increases support rents. Admittedly, their higher rates are primarily an attempt to slow inflation.
But in the context of the real estate sector, the Fed is trying to combat a supply problem by dampening the demand for home buyers. Eventually, policymakers will have a chance to stifle the question of whether today’s mortgage rate will double. The effect is that higher house prices drive crowds of people to rent properties. They can’t afford to buy drinks in the desert.
Two big variables are as rigid and bulletproof as Kevlar: high demographic demand and poor housing supply. They cannot change in the next few years.
Today’s losers are first-time renters and buyers. Today’s winners are existing homeowners and rental property owners.
I discuss the future of the real estate market and how to profit from a rental property every week on the Get Rich Education podcast.
The views expressed in this article are the views of the author and do not necessarily reflect the views of The Epoch Times.