Before the pandemic, there were problems related to economic accessibility. However, now this situation aggravates the problems, but on the other hand, correspondingly, it provides opportunities for many. Many families have relocated outside the cities and the states due to the rapid inflationary costs of buying and renting. Although inflation has outpaced the dollar, it has remained constant at around 1.8% over the last decade until now (Brumer-Smith, 2022). This paper demonstrates a perspective on a few trends within the real estate market, such as inflation and rising interest rates, the cost of renting and buying, which have adverse effects on people’s ability to afford adequate places to live. Furthermore, this research highlights how people are being pushed out of large metro cities resulting in a loss of market share, feeding into the emerging issue of rent and housing affordability.
Inflation and Rising Interest Rates
Inflation and rising interest rates are not a new concept, although they may appear new due to a moderate inflation increase and steady interest rates for more than a decade. As the cost of goods, services, and technology has increased over time, so have the prices to obtain or utilize these commodities; therefore, the dollar loses a percentage of its value over time. Over the past decade, the United States has averaged about 1.8% but has jumped to 8.54% from 4.7% in 2021 (Webster, 2022). This results from increased consumer demand, less supply of goods and services, supply chain issues, and labor shortages. As a result of the rapid inflation increase, interest rates rose to help stabilize the market. The real estate market started to gain strength a year and a half after the start of the pandemic and continues to show growth to date.
One important aspect is that prices continue to rise due to the low supply of houses for sale. For the first time since February 2011, the mortgage rate in the United States for a 30-year fixed-rate mortgage has reached 5% (Grossman, 2022). In November 2018, this figure approached 5% but never reached this level before falling to a historic low in December 2020, when the COVID-19 pandemic began (Grossman, 2022). With inflation rising month after month, the Federal Reserve has planned a total of seven rate hikes across the market, the first of which occurred in March, and the second has yet to come. Mortgage rates have risen, and housing prices continue to rise due to the lack of inventory. According to Freddie Mac, one of the two state-backed mortgage companies, market fluctuations and constant price increases significantly impact buyers (Freddie Mac, 2022). As Americans struggle with historically high inflation, rising mortgage rates, high home prices, and a shortage of inventory, home purchases have become the most expensive in a generation.
Renting and Buying Real Estate
Currently, house prices in the United States are steadily rising due to limited materials and slower construction processes. Inflation has made rents and purchases more expensive, leaving potential homebuyers in a situation where they are forced to spend more. The lack of affordable homes contributed to the price increase, even if the property’s actual value has not changed. The increase in mortgage rates means that the house will be more expensive after the purchase, but it will also affect the monthly fee, which is relatively large for the average working citizen.
It is essential to point out that according to ATTOM, a real estate analysis company, property taxes increased in 2021. Their data shows that a year earlier, housing prices increased by 16%, but at the same time, tax charges lagged behind the growth in the real estate value (ATTOM, 2022). Thus, total taxes have risen reasonably high because the value of homes has been growing much faster than taxes across the country, which has led to lower effective tax rates.
As ATTOM mentions, the average cost of houses has increased by about 10% due to the limited supply for sale compared to the number of buyers. The Federal Housing Finance Agency has increased credit limits for potential buyers to encourage more house purchases. In some areas, residents can apply for a loan of up to $970,800 if the market is one of the 100 major U.S. cities considered more expensive (ATTOM, 2022). On a federally backed mortgage, other potential homeowners could receive up to $647,000 in 2022 (ATTOM, 2022). The increased amounts were intended to solve problems related to rising prices, while wages did not change comparatively.
The agency’s ability to influence the supply of affordable housing for low- and middle-income households is limited, and the market is subject to shortages. Both the shortage of labor and problems with the supply of materials reduce the availability of new housing construction and repair of existing housing. Various data indicate that as mortgage rates rise from the lows set during the COVID-19 pandemic, with further increases until 2024, rising rates may increase concerns about affordability for new borrowers as the housing supply remains limited.
Loss of Market Share of Large Metro Cities
In large cities of the USA, such as New York, Chicago, San Francisco, Los Angeles, and others, the population is actively decreasing. The rising cost of living in big cities forces Americans with middle income to look for more affordable options in small towns. The growing popularity of remote work also facilitates this trend. Nashville, Tennessee, Florida, and Arizona became the hottest spots in the central part of the United States in 2021 – people are leaving large megacities closer to water and nature (Kramer, 2021). However, this situation is observed in almost all countries, including the European Union; residential real estate today received a shifted focus of attention to objects in quiet green areas. These are places where people can access the necessary social infrastructure without a car or public transport (Kramer, 2021). A similar situation is happening in the US, as people are looking for cheaper alternatives to live.
A severe population outflow from large cities is provoked, contributing to a decrease in economic growth. This is due to the amount of labor needed to maintain production volumes in large cities is noticeably decreasing (Kramer, 2021). All this directly affects the real estate market, as the outflow of oil provokes price instability in these zones. In addition, this may lead to the appearance of empty houses that cannot be sold as people seek to change their place of residence.
(Emerging Issue) Housing and Rent Affordability
In the US, rents are increasing at the fastest pace in decades. It is worth noting the fact that its growth was 11.3% across the country (Zilber, 2022). Thus, economic problems due to the pandemic have reduced the already shrinking housing market. Rising rental prices are forcing more and more Americans to think about what kind of housing they can afford (Kramer, 2021). The growth rate for rental housing reached its maximum in the last several decades from coast to coast. The growth in rental prices across the country amounted to record numbers, as has already been reported before.
The most significant indicators are recorded in the country’s south, where many have moved amid the pandemic in pursuit of remote work and a warm climate. Prices rose the most in three Florida cities. In Naples, located on the Gulf coast, the average growth during the pandemic reached 39% (Kramer, 2021). In Texas, it is also becoming increasingly difficult to find affordable options. According to the website realtor.com (2022), the cost of renting in Dallas has increased by 21% over the past year. Due to a report by the National Association of Realtors (NAR) (2022), home sales in the United States fell by 4.5% compared to March 2021. A total of 5.77 million residential properties were sold last month, including cottages, townhouses, condominiums, and housing cooperatives (National Association of Realtors, 2022). Thus, it becomes obvious that the purchasing power is significantly reduced.
Given the number of sales, it is the lowest figure since June 2020, when the housing market was experiencing the pandemic’s peak. Due to a decrease in demand for housing, the number of residential buildings for sale by the end of March increased to 950 thousand, 11.8% more than a month earlier and 9.5% less than in March 2021 (National Association of Realtors, 2022). Thus, the housing market is beginning to experience the effects of rapidly rising mortgage rates and rising inflation, which affects the purchasing power of consumers. However, it should be noted that home sales also remain at a high level, which may indicate government stimulation. In this case, the authorities should carefully monitor the situation to avoid the possibility of a repeat of the mortgage crisis.
The state of the real estate market remains uncertain. Based on the current government policy related to the increased issue of the dollar, there is a substantial increase in inflation. This predominantly affects interest rates, which play one of the essential roles in the housing market. Potential buyers face various problems related to the fact that the availability of new homes is significantly reduced. In addition, there are also noticeably fewer opportunities for rent. This is due to many factors that influence the fact that the supply is growing in the market, and the number of people ready to purchase is insufficient. On the other hand, it is also an essential factor in emerging trends caused by the pandemic.
This situation has primarily provoked the desire of people to move within the country. This is done to find new, more affordable housing. Another factor may be the emergence of great opportunities for remote work. Consequently, the population’s motivation to live in densely populated large cities decreases. A noticeable outflow of population provokes a decrease in the economic growth of large cities. However, on the other hand, this leads to a factor contributing to the economic growth of smaller settlements. Despite all the positive and negative trends, the most noticeable problem remains the decline in housing affordability and rental opportunities. This is caused by the rapid increase in cost, which limits the possibilities of the population.
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