Two powerful forces are likely to crimp housing supply in the years ahead, according to a recent analysis.
The first is the reluctance of many homeowners to trade historically cheap mortgages for pricier ones when they move. And the second is the tendency for more seniors to age in place.
That’s according to Mark Fleming, chief economist at First American Financial Corporation, a large title services company.
New data have brought what Fleming calls an “unprecedented homebody era” into sharp focus.
In May 2019, the average tenure of homeowners in the U.S. — that is, the amount of time a typical homeowner lives in their home — rose 10 percent year-over-year to 11.3 years, according to First American’s proprietary Potential Home Sales Model for May 2019, released on June 20.
That’s more than double the average homeowner tenure before the 2017 crash — when it was just about five years.
Today’s tenure is also up from an average of seven years between 2008 and 2016, according to Fleming.
Meanwhile, total housing inventory is hovering near historic lows — a 4.3-month supply in May at the current sales pace, according to the latest NAR data.
One reason for the increase in tenure is that most homeowners today enjoy mortgages with historically low interest rates.
“[T]here is limited incentive to sell if it will cost them more each month to borrow the same amount of money from the bank,” Fleming said in a statement.
Mortgage interest rates still remain highly affordable, and even showed a recent dip. The average rate on a 30-year fixed-rate mortgage fell to 4.07 for May, down from 4.59 a year earlier.
But that’s still higher than lows seen during the housing slump and recovery. The average annual rate hit a trough of 3.65 in 2016, barely beating a previous record of 3.66 set in 2012.
Interest rate cuts and bond-buying by the Federal Reserve helped push down mortgage interest rates during the recovery. But they are likely to trend upwards over the long term, according to Fleming.
“It’s not feasible to be always and forever this low so they should eventually rise,” Fleming told Inman. “Fed policy played a role in pushing rates down this low (quantitative easing) and will the other way too.”
This suggests homeowners will feel even more pressure to hang onto their homes in the years ahead, rather than sell and buy a new one using a mortgage with higher rates.
“Collectively, the aforementioned market forces contributed to a positive gain of 366,000 potential home sales, but it was not enough to offset the loss of 446,000 potential sales due to the impact of rising tenure,” Fleming said in a statement.
The growing tendency of seniors to choose to age in place is a second force that is likely to curtail inventory in the years ahead.
“Improvements in health care and technology have made aging in place easier, which has meant fewer homes on the market,” Fleming said.
A recent study by Freddie Mac underlined this trend, Fleming pointed out: it found that if seniors and adults born between 1931 and 1959 behaved like previous generations, nearly 1.6 million more housing units would have hit the market by 2018.
Increasing consumer buying power — driven partly by rising wages — and rising household formation is fueling housing demand, according to Fleming.
“Yet, today, we are in an unprecedented homebody era as many existing homeowners continue to feel rate-locked into their homes and seniors continue to age in place,” he said. “Looking ahead, more than half of all existing-homes are owned by baby boomers and the silent generation and they will eventually age out of homeownership. But right now, housing supply remains tight – you can’t buy what’s not sale — and market potential is lower because of it.”
In a separate statement, Lawrence Yun, chief economist for the National Association of Realtors (NAR), the industry’s largest trade group with about 1.3 million members, called for more home construction as part of NAR’s latest home sales report.
“More new homes need to be built,” he said. “Otherwise, we risk worsening the housing shortage, and an increasingly number of middle-class families will be unable to achieve homeownership.”
Meanwhile, some activists and municipal lawmakers around the country are calling for changes in zoning laws to make it easier for developers to build more dense, multifamily buildings, further increasing the supply of available homes for sale and rent.
Ben Carson, Secretary of the U.S. Department of Housing and Urban Development, recently said he wanted to see more cities follow in the path of Minneapolis, Minnesota, which late last year ended exclusive single-family home zoning throughout much of the city limits.
However, other activists in cities across the U.S. are resistant to changing the zoning to allow for higher-density developments, concerned that developers will benefit the most and that the homes constructed will tend toward luxury or higher-prices than existing areas can afford, and that they may change the local character of neighborhoods in undesirable ways.
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