On 10th Anniversary of Great Recession, Housing Market Still Faces Challenges

Last month marked the 10-year anniversary of the end of the Great Recession. First American Financial Corp., Santa Ana, Calif., said between then and now, housing affordability has improved and borrowers have greater access to credit, which in turn is boosting demand.

However, First American also noted housing supply, particularly for entry-level housing, continues to hamstring the market.

“Today’s housing market enjoys much stronger demand than a decade ago, but housing supply has slumped,” said First American Deputy Chief Economist Odeta Kushi.

First American said since the end of the Great Recession, affordability has improved, largely driven by lower mortgage rates and rising household income. Mortgage rates are even lower than a decade ago–the 30-year, fixed mortgage rate in April was 4.1 percent, 1.3 percent lower than in June 2009. The lower mortgage rate, combined with higher household income, has increased consumer house-buying power by 54 percent since the end of the recession. At the same time, credit availability has improved by 30 percent according to the Urban Institute Credit Availability Index, increasing the number of potential home buyers.

“More house-buying power and expanded access to credit, along with a demographic tailwind from millennials aging into prime home-buying age, all bode well for housing market demand,” Kushi said. “The question is whether there are enough homes for sale to meet this surging demand.”

The short answer, Kushi added, is “no.” The report said inventory turnover has declined by 16 percent since 2009. A major reason for the lack of homes for sale is increasing tenure–in the years following the recession, tenure has rapidly increased and it is currently more than 11 years, compared to just under seven years at the end of the Great Recession.

“Increasing tenure means existing homeowners, who supply the majority of homes for sale, are not selling and is the byproduct of two trends–older homeowners aging in place and many existing homeowners being locked-in with historically low mortgage rates,” Kushi said.

First American said a “natural solution” to a housing supply shortage is to build more homes. Yet, for more than a decade, home building has not kept up with the demand for shelter. While housing starts, a leading indicator of new home completions, have doubled since the lows reached at the end of the recession, they remain 33 percent below their 2000 level. The gap between supply and demand today remains high. In 2018, 1.2 million new households were formed, while net new supply of housing units was below 900,000 units. New household formation is expected to continue to grow as millennials are still forming households, so the need for more housing is likely to also grow.

Despite a lack of supply, the homeownership rate has increased from a low of 63.4 percent in 2016 to 64.4 percent in 2018, which is very close to the homeownership rate at the end of the Great Recession. “After 10 years, the housing market has recovered from the Great Recession by many metrics,” Kushi said. “Demand is stronger, but a decade of building deficits has helped create a significant supply shortage. After all–you can’t buy what’s not for sale.”