1.5 Million New Homes Needed To Meet Demand, Says Freddie Mac, But There's A Catch

The U.S. housing market faces a significant problem: there aren't enough homes to go around. Experts at Freddie Mac say we need an extra 1.5 million homes to meet current demand. This shortage is evident because there are very few vacant homes for rent or sale, putting a lot of pressure on people looking for a place to live.

However, it seems that the 1.5 million shortage is an understatement, as it doesn’t account for potential housing demand and vacant housing that is not for sale or for rent. Freddie Mac had earlier estimated a shortage of 3.8 million homes, but they used a different method to come up with that number compared to the study mentioned above.

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High Mortgage Rates

The 30-year fixed-rate mortgage has increased to over 7%, slowing down the housing market and leading companies to build fewer homes, making it difficult for many people to afford a home. Higher rates also mean current homeowners don't want to sell their homes since they would lose the lower rates they locked in before.

In fact, more than 60% of homeowners have mortgage rates below 4% and 90% below 6%, thanks to buying or refinancing their homes when rates were lower. On average, these homeowners have saved about $66,000 each because of their lower rates, which makes them less likely to move and sell their homes, keeping the number of available homes low.

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Generational Differences In Mortgages

Even though many homeowners are staying put to keep their low rates, life changes eventually force people to move. Different generations have different mortgage rates, which affects the housing market in various ways.

According to Freddie Mac, millennials have the highest average loan amounts and still have about 25 years left to pay off their mortgages. Older generations, like the Silent Generation and Baby Boomers, who recently refinanced their homes at low rates, still have more than 18 years left on their mortgages.

Over 90% of Gen Z are first-time homebuyers, and they also have the highest rate at 4.9%, while Millennials and Gen Xers have the lowest rates at 4.0%. 

Low Rates Lock Gen Xers Longer, But Millennials May Move Anyway

Low mortgage rates are a great deal for current homeowners, but they're also causing a shortage of homes for sale. 

Gen Xers are several years away from retirement and have mostly moved on from their starter homes to bigger ones. Because of their life stage and the appealing low mortgage rates, they're less likely to move, enjoying their lower rates for a longer time.

Millennials, especially the younger ones, behave differently. They often have more dynamic job situations and growing families, which prompt them to move to bigger homes, even if their current mortgage rates are low. As Freddie Mac highlights, in 2022, about 12% of Millennial homeowners moved despite having an average mortgage rate of 5.3%. In comparison, only 3.8% of Baby Boomers and 5.5% of Gen Xers moved, according to the American Community Survey.

This trend shows that Millennials are less likely to be "locked" by their mortgage rates, which helps keep the housing market active by moving from starter homes to larger ones.

Potential For Refinancing

Should mortgage rates drop below 6.5%, over 3.4 million borrowers could benefit from refinancing, with a considerable portion of these being Gen Xers. This implies that while Millennials and Gen Xers currently have lower average rates, there is substantial potential for refinancing if interest rates decline.

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