Across the United States, home and apartment construction is finally catching up with demand, so much so that supply growth could outpace demand growth, leading to lower home prices and rents, according to .
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How much that affects Southern California will come down to density and available land.
Before I dig into the report, “Implications of a Persistent Slowing in Housing Demand,” consider a few positive and negative implications of depressed home prices.
On the positive side, whether you are renting or planning a home purchase, prices will become more affordable. Homes will become more accessible.
You’ll need less money for down payment and closing costs. Your house payment may be less.
You may have more disposable income to save or invest or just spend.
On the negative side, family wealth and generational wealth may erode as most wealth starts with property appreciation.
Especially for those with small down payments, homes could end up under water with negative equity. That makes it more difficult to refinance your mortgage or sell your home.
Back to the report and some of its key findings:
— Following the financial crisis in 2007-08, strong millennial household formation contributed to housing demand, which outpaced construction, resulting in rising home prices and rents and estimates of a national housing shortfall ranging from 1.5 million to 7.3 million units.
— During the pandemic, historically low mortgage rates accelerated housing demand and further increased home prices and rents. Meanwhile, homebuilders responded with increased construction activity, particularly in multifamily (apartments) housing in the South and West.
— By 2025, housing market conditions began to rebalance as demand cooled and newly constructed housing entered the market. Vacancy rates increased, rent growth slowed, and for-sale inventory expanded, particularly in Sun Belt markets.
— Housing affordability remains strained in many markets but has recently improved as income growth has outpaced increases in home prices and rents.
— Demographic trends — including population aging, lower birth rates, smaller and younger adult cohorts, and reduced immigration — are expected to slow household formation over the next decade.
— Housing supply is likely to increase gradually as aging Baby Boomers transfer homes to younger generations.
— If residential construction remains elevated while household formation slows, housing supply growth could outpace demand growth in some markets, placing downward pressure on home prices.
— Slower housing demand growth could have important implications for the mortgage industry, including effects on mortgage origination volumes, borrower equity accumulation, and credit performance.
My key takeaways
The math says a national over supply of housing may happen as soon as 2035. However unlikely, if the U.S. changes policy at some point under a new administration, and the immigration floodgates open, there will be a significantly lower chance of an oversupply.
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According to the report, an estimated growth in the housing supply will be between 10.6 million and 14.6 million units from 2026 to 2035. Growth in supply could exceed growth in housing demand by 2035.
Orange County, Los Angeles County and San Diego County are more insulated from significant price drops because of the housing density. There isn’t a lot of available space left to build on.
The Inland Empire is a different story. The counties of Riverside and San Bernardino have plenty of available space for building, meaning they are more susceptible to an eventual oversupply.
According to the report, housing price growth slows and, in some cases declines, in markets where single-family construction has expanded meaningfully, including states such as Arizona, Texas and Florida.
I give the Mortgage Bankers Association a lot of credit for putting a spotlight on such a hugely important possibility: residential real estate depreciating in the not-too-distant future. Trade associations tend to be cheerleaders, staying away from difficult or negative topics.
According to the report, the potential for oversupply and falling prices is a concern for the mortgage industry.
The most direct impact is on origination volume, as fewer households purchasing means fewer loans. For existing homeowners, falling prices would erode equity, limiting access to cash-out refinancing and increasing the likelihood of selling at a loss. We are also concerned that falling prices would push more of today’s homebuyers underwater on their mortgages.
Recent borrowers and those with low down payments are most vulnerable, as they have the least equity cushion to absorb a price decline.
My advice: If you are going to buy a home or investment property, find an in-demand area with plenty of housing density. For example, near good schools or near a college. Stay clear of areas where lots of new home building is in the works.
Freddie Mac rate news
The 30-year fixed rate averaged 6.49%, 6 basis points higher than last week. The 15-year fixed rate averaged 5.82%, 3 basis points higher than last week.
The Mortgage Bankers Association reported a 2.2% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $127 more than this week’s payment of $5,258.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75 %, a 15-year conventional at 5.625%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.99% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.5% and a jumbo 30-year-fixed at 6.25%.
Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.375% for the first five years payments, and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].
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