Wharton real estate professor Fernando Ferreira doesn’t believe the U.S. housing market has entered a recession.
Home sales are falling in response to rising interest rates, but there’s still a mismatch of supply and demand, he said. That mismatch is at the core of the current U.S. housing crisis, and there’s no quick fix for it.
“I don’t think it’s in a recession yet. That’s a bit of a strong word,” Ferreira said to Wharton Business Daily on SiriusXM. “The housing market has a ton of problems — historical problems, recent problems, we can go over all of them. But I wouldn’t call it a recession.”
Ferreira, who is also a professor of business economics and public policy, said the slumping sales have pushed prices down, but housing is still extremely expensive for most Americans. The median sale price of a home in July was $403,800, down $10,000 from a month earlier, according to the National Association of Realtors.
“That’s good news for landowners and homeowners, and it’s bad news for prospective buyers,” Ferreira said. “If you own your house right now, you’re probably pretty happy that prices have been appreciating and your equity is increasing. But if you’re a young family with kids, and you don’t want to rent anymore, and you’re looking for a new place, that’s a tough price to swallow.”
It’s tough just about everywhere for new and first-time homebuyers faced with historically high prices and climbing interest rates. But some regional markets are harder to crack than others. Ferreira noted the San Francisco Bay Area, for example, where it’s hard to find a house for less than $1.5 million.
“Right now, the prices are so wacky it’s even difficult to think what’s the low end of the spectrum,” he said.
The Elephant in the Room
The lack of adequate housing supply is the “elephant in the room,” the professor said, and the reasons are complex. Housing construction is permitted at the local level, and many jurisdictions have regulations that home builders find onerous or overly restrictive. Many of those regulations passed as a result of pressure from so-called NIMBYs (Not In My Backyard), an acronym for residents who fight against multifamily buildings and other types of new construction because they fear a lowering of their own property values, increased crime, or other threats. Ferreira said these issues have suppressed new home construction for at least a decade, and the more recent price surges in labor and materials have only made it worse.
“There’s been a long-term trend of not allowing any new construction, at least not any type of dense construction, on both coasts and in the majority of big cities in the United States,” he said. “Over time, that created this gigantic difference between demand and supply of homes. And to be honest, that’s the main reason [for] these extremely high prices today.”
More supply is the only way housing prices will drop significantly. And the only way to increase homebuilding is to loosen regulations to allow for more and different types of construction, he said. Ferreira praised the cities of Dallas and Austin, Texas, which have kept up with significant population growth by allowing more construction, including multifamily structures.
Until the market is corrected, prospective homebuyers will continue to struggle with finding the balance between what they want and what they can afford. Ferreira thinks a young family looking for the typical three-bedroom, two-bathroom home in a good school district can’t be too picky these days, especially when rising interest can add hundreds of dollars a month to the cost of a 30-year loan.
“I don’t think that scenario will change unless you have a real recession,” he said. “I think the housing struggles will persist at least for the next few years, and to be honest for the next five or 10 years. The reason is simple: Solving it requires a lot of new supply, and it takes a long, long time for supply to adjust.”