The Housing Market Has Gone From Bad to Worse

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If you want to buy or sell a house in 2022, I wish you good luck. Mortgage rates have increased faster than in almost any period on record, adding tens or hundreds of thousands of dollars to the typical cost of owning a home. For many people, that point is immaterial, because they can’t even find a place to buy: The number of available homes is still about 40 percent lower than it was before the pandemic. If you want to find a new place to rent, good luck twice over. The average rent has soared to an all-time high, as demand surges in the absence of available units.

One could tell a simple story about the housing market to explain all of this madness. There was a pandemic, followed by inflation, followed by rising interest rates: That’s it; the end. But zoom out and a more accurate picture comes into focus. The 21st century has been a tango between vertiginous swings in demand and corresponding swoons in construction, which has left us with a historically unusual shortage of available housing.

The full story of the 2022 housing market begins at least 15 years ago, in the flaming dumpster fire of the global financial crisis. After years of undisciplined lending, the U.S. real-estate market collapsed and dragged down financial markets. Home prices fell for six straight years from 2006 to 2012. The number of new homes under construction plummeted to a disturbing low as the 2010s became the worst decade on record for home building per capita.

Ten years ago, the U.S. housing market might have seemed dead. But several factors conspired to bring it back to life. The supply of homes all but stagnated just as the Millennial generation—the largest in American history—aged into its prime home-buying years. College graduates plowed into downtown neighborhoods, leading to a sharp rise in living costs in America’s largest cities, and then pushed into the suburbs. Meanwhile, mortgage rates fell below their 50-year low. The combination of constricted supply, skyrocketing demand, and bargain-basement rates set the stage for a surge in home prices. In 2017, 2018, and 2019, the Case-Shiller national home-price index set new all-time highs each year.

Then the pandemic hit. In March 2020, the economy experienced a flash-freeze depression in the face of a normalcy-destroying virus. The economy ground to a halt and homebuilders, scarred by the housing crash of 2007, pulled back. “Builders remembered what happened in 2007 and 2008 as a near-death experience,” Tracy Alloway, a financial commentator, told me on my podcast, Plain English. Nobody wanted to overbuild for the second time in 15 years.

But their expectations were wrong, and not just a little wrong. Catastrophically wrong. The year 2020 wasn’t anything like 2008 in the real-estate industry. Rather than implode, the housing market went berserk in the opposite direction. The federal government sent checks to more than 100 million households even as typical families couldn’t or wouldn’t spend their money on leisure experiences—movies, vacations, amusement parks—which left many households richer than they were before COVID. Families with means, tired of being locked in their home, made Zillow the new Netflix. Thrust into a work-from-home experiment, the white-collar labor force drove demand for larger houses with more space for at-home offices. One study from the Federal Reserve Bank of San Francisco found that remote work was a key driver of the rise in housing prices.

After 2007, supply outstripped demand, and housing prices fell for years. But after 2020, demand outstripped supply.

“Whether it was windows, lumber, garage doors, roof tiles, or washing machines, [suppliers were] never able to catch up from that standing start in spring of 2020,” the financial commentator Joe Weisenthal told me. In April of 2021, half of the houses listed nationwide had pending contracts in less than a week. One Maryland resident infamously included in her offer “a pledge to name her first-born child after the seller.” She didn’t even get the house.

This madness set the stage for an utterly bizarre 2022. As the rising cost of shelter helped push up core inflation, the Federal Reserve raised interest rates—again, and again, and again. It’s hard to appreciate just how dramatically mortgage rates have trampolined, but maybe this sentence does the trick: Just 20 months ago, the average fixed rate for a 30-year mortgage was lower than at any time on record; today, it’s higher than in any other month this century. “You’d be kind of crazy to sell your house right now unless you have to,” Weisenthal said. It’s not a great buyer’s market, because rates are spiking. And it’s not a great seller’s market, because owners don’t want to double their monthly payments by taking on a new mortgage at a higher rate. While the flash-freeze recession of 2020 brought the housing market to a boil, the simmering inflation of 2022 has somewhat frozen it.

So far this century, first-time home buyers have every right to feel like they are victims of a horrible cosmic prank. In the late 2000s, the housing crisis raised unemployment and dampened aggregate demand, which made Millennials poorer. In the 2010s, the evisceration of the construction industry led to a shortage of new homes, which contributed to higher prices. In 2020 and 2021, a pandemic visited several horrors on the country and unpredictably spurred a run on housing that drove prices into the stratosphere. And in 2022, mortgage rates spiked from all-time lows to all-century highs in a matter of months. I’m not a believer in curses. But if anything is cursed in this world, it’s the 21st-century American housing market.