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Why is there a housing shortage?

Couple meeting with real estate agent in front of home
MoMo Productions/Getty Images

If you're a first-time homebuyer or in the market for a new home, you may have noticed there aren't too many houses available. The ones that are seem to have sky-high prices. One of the biggest questions on homebuyers' minds is why is there a housing shortage?

U.S. home prices have increased nearly 20% in the last year alone. It's caused financial pain for many first-time buyers and growing families. The current housing shortage is the result of several complicated factors, and there's no easy answer for when it might end.

Let's take a closer look at what is causing this housing shortage, how long the housing shortage will last, and what you can do to make the wisest financial moves while you're searching for your next home.

Why is there a housing shortage? It's all about supply and demand

The simplest reason for the high costs of housing is supply and demand. As the U.S. population grows, more people need a place to live. The large millennial generation is reaching their mid-30s, and many of them are starting families and want to buy a home.

But there just aren't enough homes to keep up with this demand. By some estimates, the U.S. housing market is nearly 4 million homes short of demand. This limited supply plus higher demand equals soaring prices. How we got here can be traced to recent history—the housing bubble and bust, also known as the financial crisis of 2008.

The financial crisis of 2008's influence on today

In 2008, the U.S. experienced its biggest economic disaster since the Great Depression. After years of red-hot real estate prices and investor speculation on homes backed by low-interest rates and subprime mortgages, the market finally hit a limit. Millions of Americans lost their jobs and had their homes go into foreclosure. The resulting turmoil in the financial industry caused massive losses in the stock market and a near-catastrophe in the global financial system.

But the financial crisis didn't just hurt mortgage brokers and real estate agents. Many homebuilders went out of business, and as a result, fewer homes have been built. It has taken years for the homebuilding industry to recover from the damage that started in 2008. Then the COVID-19 pandemic hit, and the industry suffered again with unprecedented shutdowns that led to workers leaving their construction jobs.

This has spiraled into a systemic problem, and unfortunately, today's homebuyers are paying the price.

How low-interest rates caused high home prices

Another factor in the recent surge in home prices has been the historically low interest rates in effect during the pandemic. When homebuyers can get a fixed 30-year mortgage for less than 4% APR, it's easier for them to afford a higher-priced house. So the demand goes up and up, but the supply is still low.

Cheap loans and a limited supply of homes can combine to drive prices even higher. That's because buyers are often more comfortable agreeing to a higher sale price if their interest rate is low and their monthly mortgage payments are manageable. However, this recent era of low-interest mortgages might be coming to an end. During the first half of 2022, the Federal Reserve started to raise interest rates again. Mortgage rates as of mid-2022 are above 5% and climbing, edging out millions of would-be buyers.

Advice for homebuyers in today's housing market

The housing market frequently goes through ups and downs, and the housing shortage won't last forever. While the current housing shortage may seem bleak, it doesn't have to hold you back from getting into a great home. Here are a few tips to put yourself in the best position to make a successful—and affordable—offer on a home:

1. Make sure you're at the right stage of life to buy a home

Buying a home is a big commitment. Make sure you're at a point in life where you're ready to be a homeowner. Ask yourself:

  • Do you have stable employment?
  • Has your income increased? Are you able to save more money and afford the costs of homeownership?
  • Do you like the city or location where you're living?
  • Why do you want to buy a home?

Don't buy a home just because you feel like you should, are wrestling with real estate FOMO or because you think it's a guaranteed investment or tax break. You'll likely need to stay in the home for at least five years to make sure you recoup your transaction costs and potentially make a profit on any future sale.

2. Make a financial strategy for your home purchase

Buying a home takes a lot of financial preparation. This might include:

  • Saving for a down payment. To get the best mortgage rates, you might need to have a 20% down payment. If a home costs $300,000, your down payment would be $60,000 cash. However, you may be approved with a down payment as low as 3.5%. One strategy is to save for your down paymentin a bank savings account, where your money is safe and quickly accessible. Your money won't earn much interest, but it also won't be subject to stock market volatility.
  • Estimating your mortgage payment. How much of a monthly house payment can you afford? You can work this out by using the free monthly payment calculators at your bank, credit union or mortgage rate website, or use our Balanced Homebuying Calculator.
  • Budgeting for maintenance costs. One guideline is that you should plan to pay 1%-2% of the home's total value in annual maintenance costs. For a $300,000 home, that would mean $3,000-$6,000 each year. Do you have extra cash in the bank to cover these costs? If not, start saving.

3. Get preapproved for a mortgage

Once you have a down payment and an idea of what a comfortable monthly payment will be for you, you can ask to be preapproved for a mortgage. Your exact loan amount and interest rate may depend on certain factors:

  • Your income
  • Your credit score
  • Down payment amount
  • How much money you have in savings
  • Price and quality of the home

When shopping for a mortgage, be sure to consider credit unions, like Thrivent Credit Union. Credit unions tend to offer lower interest rates on mortgages and other loans. You might be able to buy more house or simply be more comfortable with the total amount you're spending this way.

Ways to work through homebuying anxiety

If home prices are too high for your budget or you don't like what's in your price range, it might make sense to hold off on a house. Waiting can have benefits: Home prices in your area might drop with the recent hike in mortgage rates, or homes that are a better fit for you might be listed. And if you don't want to wait and are ready for homeownership right now, know that the future isn't set in stone. Mortgage rates may go down again, and if so, you may be able to refinance and lower your monthly payments.

All that said, timing the market—whether it's stocks or homes—can be risky. You should always do what is right for you and your life situation.

The housing shortage is causing anxiety and tough decisions for would-be homebuyers. But you don't have to let it hold you back from being a homeowner. Meet with a local Thrivent financial advisor to talk through savings strategies and financial planning. Understand how much house you can afford. Get preapproved. And be prepared to be flexible on how much you pay, what kind of home you choose and what you're willing to live with.

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Deposit and lending services are offered by Thrivent Credit Union, the marketing name for Thrivent Federal Credit Union, a member-owned not-for-profit financial cooperative that is federally insured by the National Credit Union Administration and doing business in accordance with the Federal Fair Lending Laws. Insurance, securities, investment advisory and trust and investment management accounts and services offered by Thrivent, the marketing name for Thrivent Financial for Lutherans, or its affiliates are not deposits or obligations of Thrivent Federal Credit Union, are not guaranteed by Thrivent Federal Credit Union or any bank, are not insured by the NCUA, FDIC or any other federal government agency, and involve investment risk, including possible loss of the principal amount invested. Must qualify for membership in TCU. TCU’s NMLS ID 1012971