Why is there a housing shortage

Why is there a housing shortage? It is due to the mortgage rate trap, creating a persistent challenge for the Los Angeles housing market.

One major issue currently hurting the housing supply is the “mortgage rate trap.” Many homeowners are effectively locked into their properties after refinancing or securing a mortgage during the pandemic when ultra-low rates were available. Now, buying at current rates would require them to pay hundreds of dollars more per month in interest alone. Additionally, home prices have risen.
For many, moving simply doesn’t make financial sense. Consequently, these homeowners are not selling, and the supply of existing homes on the market remains limited. Homeowners often ask, “Why would I sell unless I have to?” With higher prices and elevated mortgage rates, staying put seems the best option for them.

Real estate experts warn that this mortgage rate trap could persist for another six to eight years, continuing to restrict supply during that time. Existing homeowners’ historically low mortgage rates and the elevated rate for new buyers drive this phenomenon. Experts believe this trend will continue for years.

Moreover, the “move-up market” essentially doesn’t exist. Starter homes have doubled in value, and while owners would like to move up, they can’t take their mortgage rates with them. As a result, the housing market is stuck, at least for now. In theory, a flood of new homes would help unstick the market.  But what the Harb and Co. Team is experiencing is that most of our listings are due to death, relocation or divorce. This is why there is a housing shortage.

Furthermore, this forecast for a “stuck” housing market creates a divide between the haves and the have-nots. The spike in home prices has increased the net worth of existing homeowners, providing them with additional financial flexibility. However, many potential buyers are on the outside looking in, unable to afford homes at these prices and interest rates. The longer they are prevented from buying, the more time they miss wealth creation.
A recent Gallup poll reflects this sentiment, with an overwhelming majority of 76% saying it’s a bad time to buy.