Realtor Mike McCann has helped Philadelphians buy and sell houses for close to four decades, but the current downturn in the property market is unlike any he has seen before.
“Sales are down dramatically from a couple years ago,” he said. “The crazy thing is that in any other downturn in my 38 years, prices start to drop, drop, drop — but inventory is low.
“People have frozen, they’re saying, ‘I’m not selling my house because I have a 2.6 per cent mortgage rate.’”
In an election marked by concern over America’s high cost of living, the country’s static housing market is a headwind for Democrats as they try to win the support of wavering voters.
While the Federal Reserve is expected next month to begin cutting interest rates from their 23-year high, its two-year effort to beat back inflation has put home ownership further out of reach for many.
In the most recent consumer price index report, the cost of housing-related expenses accounted for almost 90 per cent of the inflation recorded during July.
“Part of the American dream is home ownership. And for so many people, the American dream has become a nightmare,” said Antjuan Seawright, a Democratic strategist.
“I do think that having a specific plan around accessibility and affordability will be key for both Kamala Harris and Governor [Tim] Walz.”
On Friday, Harris unveiled proposals to give tax credits of up to $25,000 to first-time homebuyers — an effort to persuade voters that she will tackle a cost of living crisis that had eroded support for Joe Biden’s re-election bid before he dropped out of the race.
She also proposed new tax breaks for homebuilders to build starter homes, and a crackdown on unfair practices by corporate landlords and investors who buy up large amounts of housing stock.
“I’m not new to this issue,” Harris said on Friday. “I know how to fight for people who are being exploited in the housing market, and I know what home ownership means.”
“I will work in partnership with industry to build the housing we need, both to rent and to buy,” the vice-president added. Harris said she wanted to see 3mn new homes built within four years.
According to a poll by the progressive Center for Popular Democracy, 84 per cent of voters in swing states say the cost of housing is a major issue.
“Clearly anything that can help to speed the increase of housing supply will be helpful,” said Bob Triest, an economist at Northeastern University. “That could be permitting reform to try to get permits issued faster or zoning reforms that allow for denser housing in certain areas.”
Donald Trump had opened up a polling lead over Biden on the economy, capitalising on anxiety about inflation and high living costs. Harris is now closing that gap — but the Republican candidate is still trying to pin inflation on her, while pledging his own plans to drive down costs.
The 2024 Republican platform pledges to allow new home construction on federal lands, and like Harris would also offer tax relief for first-time buyers.
Markets are pricing that the Fed will cut interest rates, starting in September, by almost 1 percentage point this year, from the current range of 5.25-5.5 per cent. But the effects of a cut will only gradually reach voters.
“We’re not going to see home sales go gangbusters because of one rate cut by the Fed,” said Ryan Sweet, chief US economist at Oxford Economics. “I think [the cut’s] more of a sigh of relief.”
While mortgage rates have begun to ease — with 30-year fixed rates dropping to 6.47 per cent — the cost of borrowing for homes has risen sharply in recent years. In October 2023, rates sat at a 24-year high at 7.79 per cent, compared with just 2.65 per cent at the beginning of 2021.
“One thing that is a damper on the entire market is that buyers are facing much higher mortgage rates, so affordability is way down, even conditional on whatever the price of the home is,” said David Seif, chief economist for developed markets at Nomura.
Homeowners with cheap rates set before the Fed ratcheted up borrowing costs two years ago are also reluctant to move house because they would need to take on a more expensive mortgage. Many US mortgages are not able to be “ported”, or carried over, to new houses.
This is one reason why since August 2019 national housing inventories have declined by 27 per cent, according to data from real estate broker Redfin.
The lack of supply of existing homes is driving more activity in the new homes sector.
Demand for new houses reflected both the “chronic underproduction” of homes and historically low inventory of existing houses caused by the “lock-in effect of higher rates”, said Douglas Yearley Jr, chief executive of home builder Toll Brothers, on a recent earnings call.
Data from the census bureau shows that new housing completions were up 15.5 per cent year on year in June, but a 4 per cent year-on-year decline in starts suggest that some builders are putting construction on hold.
“It does seem like there is an increase in authorised but unstarted permits,” said Moody’s housing economist Matthew Walsh. “That would be consistent with the expectation that they’re waiting for rates to come back down to go and start on those permitted properties.”
For Americans who do not want — or cannot afford — to buy a property, renting remains costly, although the market is starting to cool. Rent inflation soared to 8.18 per cent in March 2023 — a 42-year high — but was 5.2 per cent in July.
The rise in rents means that in a swing state such as Arizona, a yearly income of almost $70,000 is needed to afford a two-bedroom apartment, according to the National Low Income Housing Coalition. That is nearly double the median annual income of $37,209.
Additional reporting by Lauren Fedor in New York
Read the full article here
