America’s Frozen Housing Market Is Warping the Economy

Cheap mortgages are forcing millions of U.S. homeowners to stay put. That is becoming a problem well beyond the property market.

If you locked in a dirt-cheap mortgage when interest rates were low, congratulations for being one of the winners in America’s skewed housing market. Renters, realtors and recruiters are among those getting the raw end of the deal.

High interest rates have had an unexpected impact on U.S. housing. Instead of triggering a fall in home prices, as happened with commercial real estate, costlier mortgages have pushed residential values higher. The value of the median existing home rose to a record $419,300 in May, according to the National Association of Realtors. Before the pandemic, it was $270,000.

Blame the “lock-in” effect of ultracheap mortgages secured when interest rates were low, which are trapping owners in their homes. It is an unforeseen consequence of years of easy money. Two-thirds of outstanding U.S. mortgages have a rate below 4%, according to Morgan Stanley’s housing strategist Jim Egan. Were these homeowners to move, they would have to pay close to 7% for a new 30-year mortgage. The gap hasn’t been as wide since at least the late 1980s.

Compounding the lock-in effect, most people have fixed-rate mortgages today. More than 90% of newly issued home loans in recent years were 30-year fixed-rate loans, compared with two-thirds in the run-up to the 2008 housing crash.

As more owners stay put, the number of homes on the market has fallen. Tight supply is pushing prices higher, shrinking the pool of buyers who can afford a home. A household earning $100,000 a year can only afford 37% of home listings today, according to the NAR. In a balanced market where there is around five months’ supply of inventory available the number should be 62%.

The frozen housing market has economic consequences. Spending linked to home sales has dropped. People normally splurge to fix up houses before putting them on the market or to renovate them after they move in. Work has dried up for professionals handling the logistics of transactions, such as attorneys and real-estate brokers. Together with the construction of new homes, these activities normally account for 3% to 5% of U.S. output, the National Association of Home Builders estimates.

The flip side is that millions of households that are locked into cheap mortgage rates can afford to spend elsewhere. They are feeling flush thanks to the $119,000 of additional equity the average U.S. mortgage holder has accumulated over the past four years. This may be one reason why consumer spending has been so resilient in the face of higher interest rates, making it harder for the Fed to bring inflation back to its 2% target.

A less obvious loser is the U.S. labor market. Workers are reluctant to accept job offers in another state if it means sacrificing low housing costs, so labor mobility has taken a hit. One study by economists at the University of California Irvine and UC Berkeley estimates that the lock-in effect discouraged 660,000 moves to a new zip code over the year through June 2023.

Craig Picken, co-founder of Northstar Group, a search and recruiting firm of top talent in the aerospace sector, said that it had become difficult to match companies with the right executives because relocations have financial costs that neither employees nor employers want to shoulder. He gave the example of a vice president of engineering trapped in a “toxic and bureaucratic” workplace with a long commute who nonetheless turned down a new role because he had an existing 3% mortgage.

“His decision came down to an Excel spreadsheet…The salary increase he’d get with the new job was eaten by higher mortgage costs,” says Picken.

Another impact of the lock-in effect is that America’s new homes are shrinking. Houses constructed in 2023 were 5% smaller than those built two years earlier. Builders are trying to keep new homes as affordable as possible for first-time buyers, but the trade-off is less space.

Some housebuilders are winners from the supply crunch, specifically large builders like D.R. Horton that have lending arms. They can use excess profit from high home prices to subsidize buyers’ borrowing costs through mortgage buydowns. They are also less reliant on bank loans to finance construction than smaller rivals. This is one reason why the market share of publicly traded home builders jumped to 51% last year, up from 41% in 2021, according to data provider Zonda.

In theory, if people can’t afford to buy their own homes, landlords should be able to charge more. Rents for individual family homes rose 3% in April compared with a year earlier, according to CoreLogic data. But rents on apartments are barely rising because there is a glut of new supply, offering some relief for tenants for now.

How long could complications caused by the lock-in effect last? Thomas Ryan, economist at Capital Economics, thinks mortgage rates would need to fall closer to 5% for supply to start to normalize. Most projections are for the 30-year rate to be around 6% by the end of 2025. Even at this level, two-thirds of existing homeowners would still have a mortgage in place that was at least 2 percentage points cheaper.

Some homeowners may decide that they can’t delay big life decisions. Divorces and growing families will always force some people to sell up. But this will only boost supply on the margin. The strangest housing market in decades won’t improve soon.

Source: Wall Street Journal

USA: This Homebuying Season Is A Dud

Hopes were high for the housing market this year, until mortgage rates unexpectedly rose.  Home buyers on the hunt in Dallas, who have been waiting for mortgage rates to drop, are finally returning to the market, says Re/Max agent Todd Luong. But it isn’t enough to make a difference overall in home sales in this North Texas metro area.

Despite a strong start to the year, sales there have dragged behind 2023 levels through much of the spring even as listings rose in the double digits, according to Zillow data. Run-ups in mortgage rates, home prices, property insurance, and taxes make homeownership “very unaffordable right now,” says Luong. “That’s a big issue.”

The homebuying season traditionally ramps up after the Presidents Day holiday in February, with buyers and sellers inking contracts through the spring and much of the summer. Hopes were high for housing this year, until mortgage rates unexpectedly rose. Now, it has turned out to be the worst season in more than a decade.

From February through May, existing- home sales, which represent closings, were at their slowest pace for that period since 2011, according to a Barron’s analysis of monthly data from the National Association of Realtors. Applications for loans to purchase a home between mid-February and mid-June are the lowest for that period since at least 2000, according to an analysis ofMortgage Bankers Association data. And yet, the market could be on the verge of a turnaround, with much better prospects for buyers.

Frustrated buyers and unmotivated sellers can blame the favorite boogeyman: mortgage rates. Rates from the middle of February through the final week of spring averaged about 7%—the highest in comparable periods since 2001, FreddieMac data show. The timing couldn’t have been worse. Rising rates squeezed buyers at the time when most house hunters typically start looking.

Many sellers kept their homes off the market, having secured historically low mortgage rates. New home sales, which are a minority of all transactions, have held up better. It wasn’t supposed to be this way. At the end of last year,Wall Street priced in five to six Federal Reserve rate cuts for 2024, which would have driven mortgage rates lower.

“There was a certain amount of optimism,” says Rob Dietz, chief economist for the National Association of Home Builders. “Some of that optimism proved to be misplaced.” But after a painful reality check— rate-cut expectations dwindled to one or two after economic data came in stronger than expected, sending mortgage rates higher—good news could soon outweigh the bad.

Traders’ expectations are more closely aligned with the Fed’s own rate-cut forecast, and recent inflation readings have softened. The 10-year Treasury yield, a benchmark for mortgage rates, has dropped in response. It was recently down nearly half a percentage point from its 2024 closing high reached in April, according to Dow JonesMarket Data. Once lower rates arrive, they will shake up almost every corner of the housing market.

As buyers and sellers re-enter the market, sales will pick up, and existing-home prices will stagnate or drop as supply expands. Lower mortgage rates will take some pressure off monthly payments, allowing some buyers to join the hunt. The magic mortgage rate for unlocking the housing market is about a percentage point lower than recent levels, says Dietz.

The builders trade group expects mortgage rates to average below 6% in the last quarter of 2025. And when they do, there will be plenty more options. The lock-in effect, a term for the financial incentive mortgage holders have to remain in place, has kept supply low relative to demand. It’s a phenomenon National Association of Realtors chief economist Lawrence Yun refers to as the “golden handcuffs.” Lower rates will allow supply to ramp up since “the strength of the golden handcuffs also diminishes,” says Yun.

The number of homes for sale has already started to climb as some owners choose to move regardless of rates, though it remains low relative to historic norms. More existing homes on the market means builders face more competition. Home-builder stocks had a strong run in 2023 as buyers turned to new construction to fill the void. Worries about rising supply, combined with still-high mortgage rates, have pressured shares this year.

The iShares U.S. Home Construction exchange-traded fund that tracks the industry is up 1.3% so far this year, while the S&P 500 index is up 14.2%. Competition fears are overblown, says John Lovallo, a UBS analyst covering the sector. He has Buy ratings on five of the seven builders he covers, including D.R. Horton, KB Home, Lennar, Meritage Homes, and Toll Brothers.

While previously owned homes are typically cheaper than new homes, that difference has eroded. “You’re getting a newer product with all the bells and whistles…and you’re getting it at a price point that’s not much higher than the existing home side,” Lovallo says. And builder stocks could get a boost from rate cuts.

“The trend for rates is probably lower from here,” he says. “That should be very good news for these stocks.” Ongoing gains in supply could shift the existing-home market back in buyers’ favor. Supply growth could soften price gains for these homes or even bring about declines in some markets, says the builders group’s Dietz. Once more owners list their homes, they will “have to do the same kind of price discovery that, quite frankly, builders did over the last two years,” he says.

Builders kept sales going by offering incentives including mortgage rate buy-downs, or price cuts. For now, both sides can be at odds over a home’s price tag. Buyers want deals that largely haven’t materialized, while sellers expect the multiple offers and fast sales of the frothy years during the pandemic, says Northern California– based Rainy Hake Austin, president of international brokerage The Agency. “You’ve got buyers who think it’s 2008, and then sellers who still think it’s 2020,” she says. 

Source: Barron's

School Shootings Are Changing the Design of American Classrooms

Architects are focusing on safety features to keep perpetrators out and create a sense of community for students.

High-profile school shootings, and the fear they spread, are shaping how architects design the modern American school.

The safety features, some required by state law, include measures meant to keep armed perpetrators out and to help first responders.

‘The typical challenge is to have the building seem very welcoming and yet at the same point not penetrable,’ said Jerry Lammers, principal of Alamo Architects in San Antonio.

But he and other architects also embrace open interior spaces to foster a sense of community. The idea is these areas can ease the isolation that might lead a troubled youth to lash out violently.

Here are some of the ways school districts are modernizing schools to combat shootings in their buildings:

1. A perimeter fence funnels people through limited entry points. A gate can be locked during school hours, and some schools station a staff member there.

2. Limiting the size of shrubbery along the school reduces hiding places. It also enhances ‘natural surveillance,’ a key element of Crime Prevention Through Environmental Design, or CPTED, principles.

3. A controlled-access vestibule from a single point of entry allows school staff to screen visitors. A three- point buzzer system—at the front door, just inside and in the front office—creates layers of security. The shooter who killed six people at a Nashville school in 2023 shot out the doors. A special film makes windows harder to smash through, similar to a windshield. Texas requires all exterior doors to have glass that can’t be ‘easily broken.’ 

4. Large, open spaces create a sense of togetherness, architects say, and help students make connections with their peers.

5. Some architects have returned to building hallway walls with concrete block. That keeps a shooter from firing through the wall and into a classroom, says David Luttrell, a principal at DAG Architects in Pensacola. 

6. Wingwalls jutting into hallways give police cover in an active shooting. Architect Matt Slagle of Michigan-based Tower Pinkster said police reviewing his plan for a new high school requested the feature.

7. Doors are positioned to limit visibility from the hall, allowing students and staff to hide from view. Small vertical windows on doors also help. Classroom doors can be locked remotely using magnetic release systems.

8. Window blind systems can be quickly activated to cover classroom windows. Architects say some districts want doors or windows that can be opened quickly so students and staff can escape from ground-level classrooms.

9. Enclosed interior spaces provide safe outdoor access to grass and sunshine—a key feature of an under-construction school designed by architect Nicki Marrone of Alamo Architects in San Antonio.

Source: Wall Street Journal