Even with the mortgage-rate surge, houses for sale remain in short supply in cities and towns

Instead, would-be buyers flocked to see the property, which is close to a train station and offers an easy commute to downtown Chicago about 25 miles east. Richter, 54, an investment manager, received several competing offers and sold the home within a couple of days at very close to the asking price. Though he was “very nervous” when he put the house on the market, he said, he soon realized that for people returning to offices downtown, “it was the ideal property and ideal location.” The deal closed in November.

In a housing market full of contradictions, anxious buyers and sellers are finding one constant: Despite rising rates, inflation, and economic uncertainty, there still aren’t enough homes to meet demand, particularly in suburban and exurban areas surrounding big cities like New York and Chicago. The townhome Richter sold is in DuPage County, for example, where the number of homes listed for sale dropped 52% in the five years ending in October, according to a MarketWatch analysis of data collected by Realtor.com, a website that aggregates listing data from the industry’s Multiple Listing Service. 

Other counties within striking distance of big cities, including Fairfield, Conn., Lake, Ill., and Montgomery, Penn., have seen similar inventory declines, the MarketWatch analysis shows. So have some big cities themselves, like St. Louis, Mo., Sacramento, Calif., and Miami, Fla. To get a sense of the bidding frenzy these shortages can still cause amid higher mortgage rates, DuPage County’s median single-family home spent just 10 days on the market in November, down from 5.5 weeks in the middle of 2020, according to regional MLS data.

Housing listings are still down 29% nationwide in the five years ending in October, according to the Realtor.com data. Economists’ and policy experts’ estimates of the nation’s total housing shortage still range from 1 million to more than 5 million homes. In some areas, inventory is down even in the last year amid soaring mortgage rates. There were 2,739 listings in DuPage County in October 2022, a drop of 34% from the 4,125 homes listed for sale in October 2021. 

That means that buyers who can stomach today’s mortgage rates and manage to find a home that fits their criteria still in many cases have to move fast and contend with competing offers. And for many would-be buyers, the supply crunch puts homeownership further out of reach–an issue not just for individuals and families but the economy as a whole, policy experts said. Lack of affordable homes boosts the number of “missing households” as people who would otherwise form their own households instead continue living with parents or roommates. With homeownership a key way to build wealth, “the later you buy a home of your own, the less wealth you’re able to attain as an individual, and the less economic benefit created,” said Mike Kingsella, CEO of Up for Growth, a housing policy research group.   

The housing shortage is also complicating efforts by Federal Reserve officials to broadly fight inflation. In 2022, the U.S. central bank boosted interest rates at the fastest pace in decades to bring inflation down from 40-year highs. Housing is a key inflation driver and the lack of housing supply is making it harder for the policymakers to bring rising prices under control. 

Many would-be sellers are backing away from listing their homes when they weigh the benefits of keeping their current low-rate mortgages–amplifying the inventory crunch, realtors said. Although mortgage rates have dropped in recent weeks, with the average 30-year mortgage at 6.5%, they’re still well above the typical rates homeowners have locked in over the last 14 years. If you’ve refinanced your home at an ultra-low rate in the past few years and decide to move now, “you’ll be dramatically increasing your housing costs, even if you purchase a home at the same value,” said Geoff Smith, executive director at DePaul University’s Institute for Housing Studies. “Extraordinarily volatile” mortgage rates have also made it tougher for would-be buyers and sellers to pencil out their budgets this year, with average weekly rate changes roughly triple historical levels, said Danielle Hale, chief economist for Realtor.com.      

There’s not much inventory relief in sight, many economists said. Although rising costs have forced many buyers out of the market, “demand continues to outpace housing supply, and housing inventory will remain tight in 2023,” said Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors. In addition to homeowners who are reluctant to sell, homebuilders are hesitant about building in precarious economic conditions, economists and policy experts said. 

Single-family housing starts for 2022 will likely be down 12% from last year, with an even bigger decline expected in 2023, said Robert Dietz, chief economist at the National Association of Home Builders. On a calendar-year basis, he sees a return to the 2021 level of 1.1 million single-family housing starts–the amount needed, he said, to put a dent in the structural housing deficit–in 2025 at the earliest. 

The current housing shortage partly stems from roughly a decade of underbuilding, economists said. The U.S. was 3.8 million homes short of meeting housing needs in 2019, a number that doubled since 2012 even as rates were low and the economy relatively strong, according to a recent report from Up for Growth. If the supply fell so short during relatively good times, “just imagine what will happen to that deficit as we move to a higher interest-rate environment” with a challenging economy, Kingsella said. “We believe this is the policy challenge of our time.” While the Federal Reserve can tweak interest rates, the housing supply solutions are largely in the hands of local policymakers, experts said. “There can be a lot of progress through common-sense reforms to zoning and land-use policies,” Kingsella said. 

The Chicago suburbs: ‘At some point, something’s got to give.’

In the suburban Chicago counties of Lake and DuPage, which have both seen housing inventory drop more than 50% over the past five years, most of the online housing listing views are coming from Chicago’s Cook County, according to Realtor.com data. It’s the continuation of a pattern that has played out since early in the pandemic, said Hannah Jones, economic research analyst at Realtor.com, as people with newly flexible work arrangements spread out from the city center in search of more bang for their buck. Nearby Lake County, a suburban  housing market, is holding up better than any other populous area in the U.S., according to a September analysis conducted by Redfin, a real estate broker, that ranked the 100 most populated metro areas based on prices, supply, pending sales, speed of sales, and other metrics. 

Although rising rates have helped make the market a bit more balanced–meaning buyers don’t always have to offer well above asking price to get a home–the limited supply still generally tips the scales in favor of sellers, local realtors said. When homes in DuPage County receive multiple offers, for example, “it’s not 30 offers anymore. It might be four or five. But it’s still happening,” said Chris Grano, a realtor in Naperville, Ill. “There’s way too little inventory for the market to crash.” In the Chicago-Naperville-Elgin metro area, one new single-family building permit is issued for every 23 new jobs, according to the National Association of Realtors’ housing shortage tracker. A balanced market would generally have one new permit for every two new jobs, Evangelou said.   

As many employers finalize policies that require workers to return to the office only a couple of days per week–or not at all–some buyers are drifting farther from the cities, realtors said. On the western end of Lake County, a 1.5-hour train ride from Chicago, people who now work downtown only one or two days a week are buying lakefront properties for prices comparable to what they’d pay for smaller homes in the close-in suburbs, said realtor Michael Lescher. “They wouldn’t do that when they were taking the train to work every day,” he said. Out west, he said, “they’ve got a boat right out the front door, and you’re on a chain of lakes” that stretches to the Wisconsin border. 

Richter, the investment manager who sold his Lisle, Ill., townhome in the fall, moved farther from the city, to Kane County, which is west of Chicago, where he now has “a ton more space and a lot more quiet,” he said. Buyers were competing for properties there, too, he said, and he was outbid on a couple of homes before snapping up his new house in Sugar Grove, Ill., within its first 24 hours on the market. Kane County listings have dropped 52% over the past five years, according to Realtor.com data. Like MarketWatch, Realtor.com is owned by News Corp.

Buyers are casting a wide net to find properties. Courtney Fricke, a teacher in Batavia, Ill., this summer started hunting around Kane and DuPage counties for rental properties to purchase. As of early December, she said, she has managed to buy one condo and been outbid on about seven other properties, often by buyers paying cash. “It’s very weird,” she said, to see prices and competition remaining strong even as rates rise. “At some point, something’s got to give.” 

When Debbie Pawlowicz listed a Naperville, Ill., townhome earlier this month, there were nine offers for the property within two days. The various offers, which ranged from 10% below asking price to slightly above asking, reflected buyers’ confusion about the current state of the housing market, said Pawlowicz, board president of the Mainstreet Organization of Realtors and a realtor based in Lisle, Ill. “Some people truly believe it’s a buyers’ market, and some people are very well-versed that when you only have 1.5 months of inventory, it is not a buyers’ market,” she said.   

Even within Chicago’s Cook County, inventory remains tight, realtors said, with listings down 36% over the past five years, according to the Realtor.com data. Jackie Lafferty, a realtor who focuses on Chicago’s north side, sees some buyers coming back to the city because they have to return to the office, while others are upsizing or downsizing. 

Realizing that they’d be working from home for the foreseeable future, John Barrett, 34, said he and his wife started looking for more space this summer. They sold their two-bedroom home in Chicago’s Lincoln Park neighborhood with little trouble, he said, but finding a new home initially wasn’t so easy. One seller wanted to temporarily lease back the home for less than the amount of their mortgage payment, he said. But as mortgage rates rose, the market became a bit more friendly to buyers, he said, and this month, the couple finally bought a three-bedroom single-family home in the Bucktown neighborhood. Although they were outbid on a couple of properties, “we could be a little bit more patient in our search” because they had no urgent deadline to move, he said, “and some of the market dynamics came our way.” 

In Connecticut, higher rates mean instead of getting 20 offers, sellers might get five

Marie Kalita sold two four-bedroom colonial houses in Connecticut’s Middlesex County this year when mortgage rates were at very different levels. After her father passed away, she sold her parents’ house in April of 2022, when mortgage rates were about 5%. At the time, her phone blew up with notifications of offers to see it immediately right after she posted the listing.

“Within 48 hours, people saw it, people gave their offer, we were done,” said Kalita, who received five offers and took one that was above the asking price and agreed to conduct a house inspection for informational purposes only.

A few months later, in November, Kalita sold her own house. By that time, mortgage rates had soared to 7%. There were fewer interested buyers this time around, but Kalita said many potential buyers still toured her home. The negotiation process was also less one-sided. She accepted an offer that was $15,000 under asking and contingent on the results of an inspection. Nevertheless, the house sold relatively quickly and for $300,000 more than what Kalita bought it for in 1984.

In Middlesex County, the number of homes available for sale plunged by 31% just in the 12 months ending in October 2022, and inventory is down by 55% in the last five years, Realtor.com data show. While Kalita found that demand for homes cooled as the year went on, it remained plenty strong. Kalita is now renting while she builds herself a new house that is delayed due to backorders for materials, windows and large appliances like dishwashers. 

David P. Gallitto, a local realtor, said he had never seen a housing market like the one the region experienced over the past three years, as an influx of New York City dwellers flooded the Connecticut market during the pandemic. He said demand was driven by workers who could now work remotely and retirees looking for a second place outside of their Manhattan apartments. 

Gallitto said the housing frenzy of a few months ago has “tempered,” but adds that buyers seem to be looking to the spring of 2023 to enter the market. 

“I think buyers are getting a little bit more cautious. They’re putting in offers that may not be full asking right off the jump,” Gallitto said. “And sellers, although a bit reluctant when they see that initial offer, also realize the type of climate that they’re in and will do their best to successfully negotiate a price agreeable to both parties.”

The way Carl Lantz sees it, higher mortgage rates mean that these days instead of houses getting 20 offers, they might get five, he said. A realtor for 20 years now based in neighboring Hartford County, Lantz has been telling his clients he could have sold homes during the 2008 housing bust if inventory were at today’s levels. In October 2021, there were 3,242 homes up for sale in Hartford County, but inventory fell by 29% to 2,314 by October 2022, Realtor.com data show. 

“I’ve said to my clients: ‘If we were in 2008 right now and we had the inventory we have right now, we would still have multiple offers. Even in the worst market ever, we would still have multiple offers,’” Lantz said.

Christopher Ross and his wife sold a home in nearby New Haven County in July. He said his expectation was that it would be harder to attract buyers because the home was an antique built in 1690. He had no trouble selling it. “We listed on a Thursday and accepted an offer at asking price by Sunday,” Ross said.

Buying a home, however, is proving more challenging. Ross said he has a fixed idea of the kind of house he would like to buy for his family — a house just shy of 3,000 square feet with four bedrooms and three bathrooms, and ideally between two and four acres of land somewhere in Hartford or Middlesex counties. But finding such a house has proved impossible. 

Instead, Ross has been trying to build his new home. But even that approach has been difficult amid a frenzy for available lots that are selling quickly. Ross said he entered a bidding war with five people in early November and lost with the lot going under contract within a week of its listing. 

It’s the kind of dynamic that Hale, the Realtor.com chief economist, said is making it challenging for housing inventory to return back to 2017 levels, even with higher mortgage rates. 

“It doesn’t change the long-run picture that the housing market is undersupplied. And I think that is going to continue to be a pressure particularly for young households in the years ahead,” Hale said. “It’s going to make it hard for us to get back to that 2017 level because we’ve had so much underbuilding over the last decade.”