Inflation’s other victim: the housing market
Skyrocketing inflation across many indices is a newer aberration, which began shortly after President Joe Biden’s inauguration. However, prices in one index—the housing market—have been churning higher for years, and demands policymakers’ attention before it devolves into a full-blown crisis.
“The typical home value of homes in Georgia is $316,705,” reports the real estate group Zillow, which represents a 27.1 percent increase from last year. Meanwhile, a mere five years ago, the typical Georgia home was worth less than $200,000. Home values have climbed so high that the Federal Reserve designated Atlanta-area homes as “unaffordable for the average buyer.”
Unless something gives, these trends could continue and price many out of the market. After all, the median household income in Georgia stands at a little over $61,000, which offers minimal flexibility to deal with rising inflation and home prices.
Broadly speaking, the forces that have re-shaped the housing market can be explained by elementary economics: supply and demand. Georgia has an incredibly low inventory of homes for sale. It’s so low that realtors are randomly calling homeowners asking them to sell their houses.
The dynamics behind the limited inventory partially stem from the fact that new construction has slowed thanks to several factors. “Builders have struggled with unstable building supply costs and a lack of skilled tradespeople to build new homes,” writes Rocket Mortgage. This has also made constructing starter homes hardly profitable for builders.
Meanwhile, there are ample prospective homebuyers. Many Millennials and Generation Zers are now established and want to purchase a home; residents from other states are flocking to Georgia and looking for places to live; and cash investors are crowding out their competition. In fact, investors—many of whom turn homes into rental properties—may account for more than 30 percent of all home sales in metro Atlanta. Combined, this has driven prices to record levels.
If that weren’t enough to contend with, home buyers must deal with volatile interest rates. The Federal Reserve is upping its rates in an attempt to get a handle on exploding inflation, but this also drives up mortgage rates, which this time last year stood around 2.8 percent. As of July 28 of this year, the average 30-year fixed APR mortgage rate was around 5.45 percent, according to NerdWallet.
For a $400,000 home, this can easily add around $400 or more to homeowners’ monthly mortgage payments, which pushes some prospective homebuyers out of the market. In fact, there are signs that the housing market is cooling as a result, but the interest hikes provide cash investors with another competitive advantage because the increases don’t impact them—so they can continue making purchases.
The simplest way to alleviate Americans’ plight is to build more houses—a lot more—but that’s easier said than done. To facilitate this, the government needs to focus on supply chain issues, workforce deficiencies and inflation across indices that have hobbled homebuilders.
In order to do so, the federal government must ease bottlenecks in our supply chain and can start by expanding the country’s capacity and permitting more 18 to 20-year-olds to engage in interstate trucking. The federal government also needs to expedite and prioritize work visas for immigrants who can fill gaps in our supply chains and those skilled in construction-related trades, given that we do not have enough workers here to do the jobs.
While the White House has been quick to blame demand, supply chain woes and Russian President Vladimir Putin for inflation, there’s far more to it than this. Years of mismanagement in D.C. and the dumping of trillions of borrowed-dollars into the economy helped drive inflation to new heights. As such, it’s time for Congress to learn to balance a budget, which they haven’t done since 2001, to help rein in inflation.
States can play a role too. Georgia, for instance, has wasted billions of dollars in tax credits on massively wealthy, out-of-state film-makers, and the return on this investment has been underwhelming. While I am not a fan of such tax schemes, if state elected officials are married to doling out tax incentives, maybe they should instead incentivize new housing construction, which might be a more prudent use of credits.
One way or another, once the construction and shipping industries are fully staffed, aren’t facing record inflation and have incentives to build, then we can begin to stem the tide in the souring housing market.