In order to get a sense for why we have a shortage in housing today, we have to go back to January 2006 when total housing starts were 1.8 million units. This put the Wells Fargo Housing Market Index at 72. The housing market index consists of single family and multifamily units. Even though the single-family starts were high, the multifamily units were low because the demand for single family homes was very high.

Since 2003, the Fed had the federal funds rate set at 1% or less and banks were giving out adjustable-rate mortgages to anyone that had a heart beat!

The Federal Reserve once again started raising interest rates in 2004, but because adjustable-rate mortgages were in favor, buyers could still get very inexpensive loans.

In Sept of 2006, the fed rate reached a maximum of 5.34% but housing starts were already on the decline.

As adjustable-rate mortgages started adjusting upwards because the Fed increased interest rates, people suddenly found they could no longer afford their new mortgage payments and couldn’t refinance the existing mortgages as their income no longer qualified them at the higher rates. This started the financial crises. People stopped paying mortgages, banks had to repossess, and we had an oversupply of housing.

As banks started winding up with REO’s they stopped lending for any new construction which dries liquidity up in the market. When liquidity starts drying up, borrowers draw on existing credit lines as fast as possible. This caused the banks to further clamp down on lending, reducing the investment and spending in the overall economy. Many builders went out of business and laid off their workforce, which further shrank the economy.

The Fed reacted and started reducing interest rates and finally in Jan 2009, the housing market bottomed out when the Fed brought its interest rates to 0.12%!

The housing index starts going up again, but this time single family homes are not being built as fast as other housing units like multifamily.

It took 10 years for the housing market to recover and just when we thought we were doing well, Jan of 2020, COVID-19 takes over resulting in supply chain and labor shortages, which reduces the housing index once again. This time multifamily and single-family construction comes to a relative stop.

In the meantime, the teenagers that were 15 and 16 in 2008 are entering the market for new homes in 2019 and 2020. But due to lower supply of new housing units, supply is very constrained. Supply is further constrained by COVID-19, yet every year a new generation of people are entering the market looking for a place to live.

The Fed inserted stimulus in the market to keep the economy moving along during the COVID-19 pandemic. With no where to go and lots of savings on hand, the demand for housing increased even further as buyers tried to purchase larger homes to facilitate work and school from home.

Fast forward to 2022, the Fed starts raising rates again and the housing index reacts accordingly. Single family and multifamily housing are starting to drop significantly yet new generations of renters and buyers are entering the market every year.