No End in Sight For Housing Crisis

Everyone on all sides of the political and economic spectrums are in agreement that (1) inflation is too high and (2) there is a shortage of housing in this country.

However, solving both of those problems seems to have become a classic Catch-22 scenario: Higher interest rates may tame inflation by lessening the demand for some goods (such as automobiles) and services, but it also serves to put a lid on new home construction.

But with fewer homes on the market (both new and existing) at a time of ever-increasing demand for homes (because of the coming of age of millennials), the prices for new homes and rents are continuing to increase even in the face of higher interest rates. In other words, by continuing to reduce the supply of new housing by means of higher interest dates, policy makers are ensuring that prices will remain high.

It is estimated that with new home construction at its lowest level in 20 years (despite a larger population), the U.S. has failed to meet the demand for housing of all types, both single family homes and rentals, by more than two million units for each of the past few years, thus creating the housing crisis we have today.

But with interest rates now at their highest levels in 20 years, new home construction will continue to fall far short of demand for the foreseeable future. Higher interest rates also have the ripple effect of keeping Baby Boomers and Gen Xers in their current homes (where they have low interest rates), which decreases the number of homes on the market for younger home-buyers.  

In other words, our housing crisis is the result of what physicists refer to as a positive feedback loop. And just as In climate science, where feedback loops are creating dire consequences for the future of the planet, so too, the housing crisis only promises to worsen with no end in sight.

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