Today, we’re examining the U.S. housing market, starting with a specific question: Should you look to rent or buy your next home? By some metrics, this is the worst time to buy a house in 40 years. Housing prices are near record highs, especially compared to local rents. For many young people, the dream of homeownership might seem completely impossible right now, thanks to huge national demand colliding with short supply, especially in high-income areas. Meanwhile, high mortgage interest rates have failed to reduce home prices, as owners are rate locked into their old mortgages. When will this sorry state of affairs turn around? Mark Zandi, the chief economist of Moody’s Analytics and host of the Inside Economics podcast, joins the show to answer our questions.
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In the following excerpt, Derek and Mark Zandi walk through a brief history of the 21st-century U.S. housing market to explain how the market arrived at its current state.
Derek Thompson: So I think what I would like to do here is have you start us off by offering a kind of thesis statement for this episode and answer the big question on my mind and on lots of people’s minds. And then after you answer that question, we’ll back up and do a brief history of the housing market and how we got to this insane place.
So the question of the moment for me here is: If the typical person listening to this show is at a moment in their life where they’re thinking, “I need a new place. Should I buy or should I rent? When I click into Zillow, should I press the rent tab or the buy tab?” What’s your advice for them? Is this a decent moment for most people to think about buying a home?
Mark Zandi: Rough time to buy a home. I’d be patient. Prices are high; mortgage rates are high. There isn’t a lot to choose from. So at the current point in time, buying is difficult. Renting is, I think probably for most people, the best route. At least for the foreseeable future.
Thompson: So relative to other years in the 21st century, which has not exactly been a golden century for housing in America, is this a particularly bad time to look to buy?
Zandi: Particularly. Very bad. Unusually bad. I mean, house prices have gone skyward since even before the pandemic, but obviously since the pandemic hit, for lots of different reasons that we’ll, I’m sure, discuss. Mortgage rates have surged. They’ve come back in a little bit in recent days, couple weeks, but they’re still very, very high, and people just aren’t selling their homes for reasons that are very idiosyncratic to the current point in time. So there’s just nothing to choose from. I mean, if you wanted to buy a home, to find one that’s consistent with your needs is pretty tough. So yeah, this is a very unique, unusual period in our housing history.
Thompson: I want to speed through some chronology to get us started because I do think it’s useful to understand the history of how we got to here, the history of the U.S. housing market in the 21st century. Which, in my mind, to understand this moment, you really do have to go back to the Great Recession and 2007, 2008.
So you go back to 2007, 2008, and I’m going to speed through this and then give you a chance to sort of edit my brief history. You have the famous financial crisis; the housing market in the U.S. crashes. Construction remains in a depression for a decade. We build fewer homes per capita in the 2010s than any decade on record. The market slowly starts to normalize in the late twenty-teens under the Trump administration. Interest rates are still low. Construction is on the mend. The millennial generation is rounding into its 30s, and that’s creating a lot of demand pressure that’s driving up housing prices.
It’s the prime home-buying years for this large millennial generation. And then, bam, right as things are normalizing, we get a pandemic. And the pandemic does a bunch of things. It sends the housing market into a frenzy. All these people with means feel cabin fever, and to cure their cabin fever, they want to buy bigger homes. Maybe they want to buy a house with an extra room for remote work. You see prices rise in the suburbs and exurbs around rich metros. Meanwhile, the construction market on the supply side is socked with all of these shutdowns and snags. So demand for bigger houses soars in the face of decades of supply constraints, and surging demand times constrained supply always equals higher prices. So prices skyrocket through and after the peak pandemic years.
Then to top everything off, [at] the end of the pandemic economy, the lockdowns are over. People are going back to restaurants, movie theaters, and everything. That creates an inflation crisis, which the Fed responds to by jacking up interest rates. Higher interest rates mean higher mortgages. Higher mortgages mean the cost of buying a house rises. And now we seem to have the worst of all possible worlds. We still have the sky-high prices from the pandemic and pre-pandemic years, but now we also have sky-high mortgage interest rates. So the two worst things you could possibly look at if you were an average person looking to buy a house. What part of this brief, rushed-through history of the last sort of 15 years leading us up to the 2023 housing market do you think I might have left out or misconstrued?
Zandi: Great job. That was great. I think you nailed it. I mean, I’m an economist, so I’ll quibble about everything you just said on the margin, but I thought you got the narrative just right. I mean, it did begin with the financial crisis back a little over a decade ago. That was a housing crash that was at the center of that crisis. Remember back to subprime mortgage, all the foreclosures. There was vast overbuilding during that period of time. And because of the collapse, it just wiped out a lot of builders and all the infrastructure to build.
People don’t recognize, but the home-building industry is a very fragmented business. You’ve got some big publicly traded builders, but you’ve got a lot of smaller builders that are on the margin financially, and they got wiped out. And so just the infrastructure to build wasn’t there. The other thing that happened was the fixed cost to build increased during that period. Because of the collapse in prices, local governments couldn’t generate property tax revenue. Those revenues are based on the value of the housing, but the housing collapsed. So localities raised permitting fees and other costs. Then there were significant zoning restrictions that have gotten even more restrictive over time.
So if you’re a builder, you’ve got to cover those fixed costs. And the way you do that is you build bigger homes. You build homes that you can sell to wealthier, higher-income households at higher margins, and they forgot about the entry-level homes, the kind of homes that people buy when they first get into the single-family housing market, the first-time home buyers. And so that’s where the shortage of homes has been particularly acute, and that’s where prices have risen most significantly and where the affordability issues at this point in time are highest. But I can go on to each aspect of your narrative, and we can discuss it, but you’re absolutely right. The genesis for this mess we’re in began well over a decade ago.
Host: Derek Thompson
Guest: Mark Zandi
Producer: Devon Manze
Read More:Why It’s So Hard to Buy a House Right Now—and Why It Might Get Better