The housing shortage is over (sort of)

There’s good news and bad news on the housing front: The buyers’ strike of the past three years is finally working, but the path to better affordability looks painful for many of those trying to sell a home, the construction industry and, ultimately, the U.S. economy.

When mortgage rates surged in 2022, it became clear that there was a shortage of housing available for buyers and renters alike, and that the rise in prices and interest rates left housing less affordable than it had been in decades. The silver lining for home builders was the opportunity the shortage represented. Prices stayed high and they kept building, supporting employment and economic activity.

Fast forward to today and it’s hard to say that there’s a national housing shortage anymore. The National Association of Realtors’ gauge for months of supply of existing homes for sale is near the highest in nine years. There are now more completed new homes on the market than at any time in the past 16 years. And there are more vacant rental units around than before the pandemic, according to online marketplace Apartment List.

Active housing inventory for sale is above 2019 levels in 14 states, spread mostly across the South and West, and including the important home-building states of Florida, Texas, Tennessee, Arizona and Colorado, according to Lance Lambert of ResiClub, a housing analytics site. Another six states in those regions are very close to their pre-pandemic levels. Together, the 20 account for 70% of all building permits issued in the U.S. this year.

Much of the Northeast and Midwest continues to have substantially less for-sale housing available than in 2019 (blame onerous rules and demographics). But even here, we’ve seen modest inventory growth of anywhere between 8% and 20% from a year earlier.

Progress has been much slower when it comes to increased buying power, based on a mix of income growth, borrowing costs and home prices. Nationally, there’s been a 10% improvement in affordability from 2023’s low point, according to figures from First American Data & Analytics. But the company’s Real House Price index is still 74% above the five-year, pre-pandemic average. The level of relief families are seeing depends on where they live, though.

Economics 101 dictates that the normalization back toward 2019 levels of affordability will continue as pricing responds to supply.

How much house prices fall — July marked a fifth month of sequential declines nationally — will determine the stress in the construction industry, where home builders continue to aggressively use mortgage rate buydowns and other incentives to court buyers. To protect slumping profit margins they’re already cutting production, decreasing land purchases and laying off workers. Residential construction employment has fallen for four straight months and will likely get worse heading into the end of the year. The number of construction job openings in August fell to its lowest in eight years.

The resale market is also concerning. Inventory levels plateaued earlier than expected this year, not because sales improved, but because there was a surge in the number of home sellers withdrawing their listings. Mike Simonsen, the chief economist at Compass Inc., the country’s largest real estate brokerage, says that the homeowners withdrawing from the market are those who bought in recent years and don’t have much or any home equity cushion. In short, they can’t afford to sell.

This isn’t a trivial group of people, with roughly 15 million homes sold since the middle of 2022 at elevated mortgage rate and price levels. Should labor market conditions deteriorate, we could be looking at a mini-foreclosure cycle as unemployed homeowners find themselves unable to handle mortgages they took out when the job market was strong and they assumed they’d be able to refinance at lower rates.

The big question for 2026 is how the housing market handles these pressures given what we’re seeing from home builders and sellers. Meanwhile, frustrated would-be buyers finally have time on their side and can wait for prices to soften further. The upshot is that housing is more likely to be a source of stress next year than a catalyst for growth, even with the Federal Reserve cutting rates to support the economy.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.