The Future of Housing

Sitting at housingwire conference and pondering about the future of housing. Here is a new realization I just had: the monthly mortgage payment difference of a 3% vs. 7% rate for a $400K, 30-year mortgage is roughly $1000. That is a $1000 post tax income difference per household. The majority of current outstanding mortgages are below 3.5% therefore a big part of these borrowers will NOT easily get out their current mortgage (and homes) unless they MUST.

The logical deductions from the said fact are therefore the following:

1. Housing transactions will remain low for many more years, until the rate comes down to around 3~4%.

2. In order for the rate to go to that neighborhood, there has to be a severe recession and big unemployment, coupled with moderate inflation.

3. The housing price will keep on going higher until it cannot. This is an inflationary environment. Large COVID handouts, the 3% mortgage windfall for many that keeps on giving, plus the ongoing global supply chain reshuffling, all indicate inflation.

4. As long as inflation is going, it is hard to see rates coming down much, EVEN IF the unemployment rate goes up a notch.

5. Renters will stay as renters for many years to come. The solution is post-WW2 GI housing and potentially incentivizing baby boomers to move out of their large homes and release the inventory.

6. Birth rate will trend down at an accelerating rate, NOT good news long term.

7. The historical 3% mortgage rate created short-term prosperity and a long-term barrier for housing/job mobility. Younger people and those without a 3% mortgage are “paying” for this, unfortunately.

There are many problems in other countries so relatively speaking America is in good shape. BUT, for real estate and mortgage industry, it feels like there are still a few more rough years ahead.