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Meet Today's Real Estate Winners and Losers

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What You Need to Know

  • The fortunes of households that bought homes before the rise in borrowing costs that began earlier this year are diverging from those that did not.
  • It's a “haves versus have nots” situation based on when, or whether, you bought your home.

The 2008 financial crisis created of a set of real estate winners and losers — both at the household and geographic level — based on how they were positioned in the housing market at the time.

Many saw the equity in their homes wiped out, and communities with economies heavily dependent upon residential construction and real estate activity -– such as fast-growing Sunbelt metro areas, particularly in the outer suburbs –- saw unemployment soar, setting back them back years.

Central business district cities such as Manhattan and San Francisco, with economies less tied to housing construction and where workers were less likely to own homes, bounced back first.

This bifurcation contributed to the widening of economic inequality in the following years, with jobs and wealth growing faster in urban cores than in the places that suffered the most wealth destruction and unemployment during the housing downturn.

Now, we’re experiencing a different kind of housing-related economic inequality as mortgage rates rise in response to the Federal Reserve’s battle against inflation.

The fortunes of households that bought homes before the rise in borrowing costs that began earlier this year are diverging from those that did not. By extension, the fortunes of communities with a higher share of homeowners are diverging from those with a greater proportion of renters.

This time around it’s homeowners and the suburbs who are the winners, while communities with a greater share of renters are losing due to the highest mortgage rates in a generation.

Bloomberg chart showing Too Expensive | Housing affordability for first-time homebuyers has plummeted as mortgage rates have surged

A good way of visualizing this is a through a series of charts from Michael McDonough, chief economist for financial products at Bloomberg LP. that shows the change in monthly mortgage payments in the Austin, Texas, metro area using average home values and prevailing 30-year rates over time.

As late as 2020 the average monthly payment was around $1,200 per month, but today, due to the surge in home values and rates, it’s above $3,000 per month.

This is bad news for would-be homebuyers in Austin and for those who earn a living from the buying and selling of homes, but the vast majority of homeowners in the Austin area owned their dwellings before the surge in values and mortgage rates.

Even to the extent higher rates lead to falling home prices, slow the Austin economy and lead to job losses, unemployment in the metro area is very low at around 3%.

Sitting on what is likely a huge pile of home equity, it’s cheaper for most Austinites to continue paying their mortgage rather than selling their home and renting in a metro area where rents more than doubled in July from a year earlier as measured by Rent.com, the biggest increase anywhere in the country.

The large increase in Austin home values was driven by out-of-state buyers during the pandemic who brought their high-income jobs to the region, either as part of tech companies growing their presence in the area or workers working remotely. It was a great trade for those who made the move, but now, at current prices, rates and rents in high-cost cities, it’s a different situation.

It’s arguably the worst time ever to rent an apartment in Manhattan at the same time that home-buying affordability in metros like Austin is the worst it’s ever been. In mid-2020, both monthly rents and mortgage payments were cheap, but today it’s the opposite.

chart showing Leaping Higher | The median sales price of a home in the US has surged about 50% since the start of the pandemic

What essentially happened is homeowners – 65% of American households – have locked in housing costs at levels that in most of the country are very low relative to apartment rents, while renters are seeing their housing costs grow as inflation remains elevated.

To the extent mortgage rates remain elevated and home values stabilize or fall no more than slightly, a dynamic will develop in the housing market nationally that only California has experience with given the property tax structure of that state and decades of booming home values.

There, people who have owned homes for decades have much lower monthly housing costs than new buyers because they have a cost basis set long ago and property tax assessments that lag far behind home price appreciation. It’s a “haves versus have nots” situation based on when, or whether, you bought your home.

There’s no easy fix. Rates would have to drop dramatically to significantly improve affordability.

But that would: (1) likely make inflation worse, and (2) mean any improvement affordability might be swallowed up by further increases in home prices. And home prices seem unlikely to fall dramatically when there’s no economic reason for owners to give up their low mortgage rates with supply constrained.

Unless something unexpected happens, this housing-based inequality looks to be a defining feature of the economy this decade, with fortunes based on whether you bought a home before 2022.

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Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments and may have a stake in the areas he writes about.

(Image: Adobe Stock)

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