The housing market has proven challenging for potential buyers in the last few years.
First, home prices soared with historically low interest rates plus inflation, soaring construction costs and a lack of available builders coming off the major societal impacts of COVID-19.
Second, mortgage rates have skyrocketed with the Fed issuing aggressive rate hikes. The Fed raised rates 5% in less than 14 months.
As a result, many people with mortgage rates in the 2-3% range feel tethered to their current home.
Home prices have stabilized or even declined in some markets. But the climb in mortgage rates (7.06% for a 30-year fixed mortgage as of June 14, 2023) along with supply constraints has made it even more difficult for prospective buyers.
So what gives? Is there a good way to buy a nice house on a nice piece of land without putting yourself into a bad financial position in this market?
That’s what a listener of the Clark Howard Podcast recently asked.
How Can I Afford Good Land and a Good House in This Housing Market?
How can I find something affordable with enough land and a quality home in the current housing market?
That’s what a listener asked on the June 15 podcast episode.
Asked Kris in Iowa: “I keep earning more but still can’t afford anything but fixer-uppers. I feel like the system is rigged to increase prices. Realtors and sellers want as much as they can get, banks want to make loans, and appraisers want employment, but if they don’t appraise at what the realtor and seller want, they aren’t likely to be used by the realtor again.
“I’ve been trying for years to find a small acreage to build a modest home. Every time I get a raise, I think I can do it … nope. Prices go up. I can’t seem to win unless I take a second job. Right now it is either a shabby house on the right amount of land, too much land to afford a land loan or a nice house on a tiny property.”
Clark acknowledges some of the dynamics that define the real estate market. Self-interests can help goose market prices. However, he says the big ongoing issue relates to supply.
“The big overriding problem is the shortage of housing units in the United States,” Clark says. “And we are millions of units short. But there are a lot of signs that the marketplace is going to take care of that.”
Housing Market Supply Expected To Improve
Clark feels a lot of optimism about the housing supply in the United States.
- Aggressive apartment construction. Clark says roughly 1 million new apartment units are in the construction pipeline. He also says that all housing units are part of the same pie whether they’re for renting or owning.
- Converting apartments and condos into multifamily units. Apartments and condos can easily convert into multifamily units, Clark says. That gives more credence to the idea that a glut of new apartment construction will help.
- New construction methods. Prefabricated homes, for example, are becoming more common. They also can save huge amounts of money for single-family homeowners.
In addition to those factors, the COVID-19 construction backlog has rapidly improved. Construction materials, which became insanely expensive, have become more reasonable. That should help match supply and demand more closely.
Clark also has mentioned on recent podcasts that he anticipates mortgage rates to decline in the relatively near future. He thinks 15-year fixed mortgages, now sitting at 6.49% on average, could dip under 5% by the end of 2025.
That all depends on the Fed and what they decide to do with interest rates. However, the most recent CPI number — how the U.S. government defines “inflation” — fell to 4.0% in May, down from 9.1% in June 2022.
The markets are pricing five-year U.S. interest rates under 4%. Markets can be wrong. But barring another major unforeseen event, it seems likely it’s a matter of when, not if, the Fed will lower rates. Just don’t expect rates as low as we experienced before COVID-19.
Along with improving supply, lower mortgage rates should make it easier for people locked into low-interest mortgages to list and sell their homes.
Explaining the Land Problem
There’s a major land issue that won’t get solved in the foreseeable future.
Americans have gravitated toward cities. And while there’s a lot of land in this country, there’s only so much space in the biggest metro areas. Even mid-sized metros are running out of space and growing outwardly.
So if you want a modest to nice home with a decent amount of land at a reasonable price, you need to be willing to move to a rural area. Or at least past the outskirts of a metro area.
“Most population in the United States is in mid-sized or large metro areas. And they have sprawled out. So land that was undeveloped or farmland has gone up a lot in price,” Clark says.
“The irony is that in much of rural America, land values have gone down. But in these areas that most Americans congregate in these mid-sized and large metro areas around the country, land even in what we think of as rural and farming land has gone up a whole lot.
“So the thing you said about the tiny property, what people are being forced to do if they want acreage is they’re being forced to go much further out even beyond exurban areas. Because it’s urban, suburban, exurban. And they have to be ultra-long commuters to get that more affordable land.”
The housing market will improve in the next few years.
Prices may stagnate for a while, or at least not increase at such a fast pace. In the meantime, the housing supply should improve. And mortgage rates should get a little better in the coming years.
If you’re willing to go a distance outside of a metro area, that’s your best bet to get a reasonably priced house of good quality with plenty of land.