A shortage of homes keeps prices high

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If you want to see everything wrong with the U.S. housing market, just head to Southern California, said Alena Botros in Fortune. It's no secret that housing in Los Angeles is expensive; the average value of a single-family home there is $906,524. But now all around L.A., in places that used to be relatively affordable, "the floor of the market has been raised." In March 2020, the average home value in Bakersfield was about $238,000, according to Zillow. Now it's up more than 40%, to around $340,000. Anthony Cerrato, a UCLA grad with a job in marketing, has been living with his fiancée in his father's house as he searches for a house to buy. But even as he looks, he's been chasing rising prices. Even if he could stretch to afford the prices he's seeing, Cerrato said, "I don't want to be house poor."

Rising interest rates haven't had the effect you might expect on the housing market, said Andrew Ross Sorkin in The New York Times. Last week, Goldman Sachs "revised its home-price forecast upward." The bank had expected prices to fall for the year but now expects a small increase because supply, however, is still so "constrained" that prices don't seem to have topped out yet. With "a typical homebuyer's monthly mortgage" at $2,600, housing is less affordable now than at any time since Goldman Sachs started tracking the market a quarter-century ago.

"A strange thing happened on the way to the housing crash," said Jeff Ostrowski in Bankrate. "Home values started rising again." In late 2022, mortgage companies had "mass layoffs" and economists expected a "housing recession." Yet though mortgage rates reached 7.31% last week, prices have barely budged, and "bidding wars have returned." If the economy stays strong, "mortgage rates could hit 8%," said Aarthi Swaminathan in MarketWatch. That will have "serious consequences for the housing market." At that level, says economist Lawrence Yun, "the housing market will re-freeze, with fewer buyers and far fewer sellers." Even in that case, the "inventory crunch" would likely keep prices from falling.

The bottom line is that "the U.S. didn't build enough housing in the last decade, leaving the country millions of homes short," said Ben Steverman in Bloomberg. Now places that have let their supply of housing atrophy are seeing families suffer and residents leave. Consider two counties: Nassau County in Florida, near Jacksonville, and Nassau County in the suburbs of New York City. Both New York and Florida have suffered a crisis of affordability. But Florida's Nassau has solved it by building, while New York's Nassau has "slowed building to a crawl." With 1.4 million people, the county issued fewer than 800 permits last year; Florida's Nassau, with 100,000 people, issued twice that. In Florida's Nassau, rents are falling and property near the beach is affordable. In New York's Nassau, not so much. Homeowners there have seen their properties appreciate. But there are powerful trends pulling people toward cheaper regions. And places that have spent years refusing to build will be "on the losing end of those trends" in the long run.

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.