Home Prices are Permanent, but your Mortgage Isn't

Welcome to my weekly real estate article, right here on BP: The Skeptical Investor.

Today, we’re talkin’ tariffs, housing supply, household formation and what to do when the economy appears precarious and the market becomes volatile. Plus eggs, orange juice and…bacon! (it will make sense, keep reading ;).

Let’s get into it.

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Today’s Interest Rate: 6.74%

(👇.02% from this time last week, 30-yr mortgage)

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The Weekly 3 in News:

1. - Rents for apartment units increased nationally by 0.6 percent in March, its second consecutive MoM increase. YoY growth remains negative at -0.4 percent, but is slowly inching back toward positive territory. In dollar terms, the national median monthly rent now stands at $1,384, up $8 per month compared to last month, but down $5 compared to March 2024 (ApartmentList).
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3. - Nashville News - Warm weather fun is in full swing! From outdoor adventures to food festivals and fundraisers, here are 20+ favorite April Events in Nashville (StyleBlueprint).
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5. - Top 5 cities building new single-family homes (per capita) are: 1. Raleigh-Cary, NC 2. Jacksonville, FL 3. Houston, TX 4. Nashville, TN 5. Charlotte, NC. This won’t make a sizeable dent in the 4.5 million homes we are undersupplied. But it’s an important symbol of where poeple are moving and what city is building/growing (ResiClub)!

There is a LOT happening this week.

Monday

• Chicago Business Barometer (manufacturing)

Tuesday

• ISM Manufacturing PMI data.
• Job Openings and Labor Turnover (JOLTS) data.

Wednesday

• President Trump's "Liberation Day." Tariffs take effect on US imports. Mexico and other countries have said they will be responding immediately with reciprocal tariffs.

Thursday

• ADP Nonfarm Employment data.

Friday

• March Jobs and Wage Report.
• Fed Chair Powell Speaks.

It could be quite a volatile week!

But, I’m not going to talk about any of this.

It’s played out, and if you want my take on the effects of tariffs you can read that here. Summary: I am not adjusting my investment posture one tick, tariffs won’t matter in the medium or long term.

So let’s get into something with a little substance:

Eggs!?

No, but they are down sharply from when we killed more than 100 million chickens last year.

Interesting how there are issues with the chicken flock we have to zap millions of them. Maybe we can do this in a different way? I bet if we don’t put thousands of them all in an indoor warehouse on top of eachotehr they wouldn’t get sick all the time. Just saying…

We talkin….Orange Juice?

NO! (But that is way down too.)

Ok, I got it… Bacon!

I always like talking pork bellies.

No Dagnabbit!…And now I’m hungry, see what you’ve done?! But bacon prices are down, back to pre-COVID levels.

Breakfast is having a great couple of months here.

So what are we talking about Skeptical Investor???

Let’s Talk Real Estate. (I keep it interesting, keep reading after bacon).

Something I saw this week that caught my eye.

People think home prices will go down.

Here is a poll of folks on Twitter saying home prices will go down in 2025 (admittedly not a good sample, but this tracks with overall pessimistic market sentiment and numerous other articles I’ve seen).

More and more folks are getting downright cynical about the US economy.

And recession or not, I’m here to say…

…home prices will not go down. Bookmark this. Throw it back in my face. Make me eat crow (no idea why that is a saying).

Side note: why is will not contracted to won’t? English is so wild.

Let me expand on this.

Prices are permanent. But, inflation is temporary + volatile today.

As a general economic rule, it’s true. And is especially true of something we have in short supply and is difficult to make. Like homes. Unlike the three commodities I listed above.

We just don’t have nearly enough housing.

We need 4.5 million more homes, by many accounts.

Even COVID couldn’t fix the housing crisis. (Insert hilarious bit by comedian Hasan Minhaj…a must-watch 1 min!).

Hahahahhaha… “Y’all are never never gonna own homes…Let God Cook!” Oh boy, what a great bit.

But I digress…

Let me give a real world data point.

☝️ Rental retention rates

Retention rates for single-family are historically high, especially in the last 20 years and just went up again (thanks to Jay Parsons and John Burns for the great charts).

The same is true of apartment units.

In fact, it appears that the lack of housing units being constructed over the last 20 years vs population / household growth has moved us into a new phase of housing supply. We are structurally undersupplied, and now we appear to be structurally stuck.

And it should be said, this process of rental turnover and housing supply will be volatile; especially in 2025 and into 2026. We still have a TON of apartment units supply coming on the market this year, a benefit of ultra-low interest rates 4 years ago. But this volatility too shall pass.

Unfortunately.

A little volatility in prices would be a good thing. With volatility comes opportunity.

The housing undersupply is worse than the numbers show.

We are undersupplied homes, which means households cannot form. If folks can’t begin their own adult lives, start a family, start cooking during their most prolific working age, and grow productivity…we won’t drive the economy forward.

And I think households are being held back more than we think.

Households: The American Dream

Household formation is the process of establishing a distinct living unit, when folks move out of shared or parental homes to create their own independent living arrangements. Economists, sociologists, and demographers often generally define a household as one or more people who live together in a single dwelling and share living expenses or daily routines, ie when we left college and the 6 of us each created our own household. (Well, mostly).

Studying households is important for us real estate folks to understand trends in population, demographics, employment and income dynamics…each affecting housing markets.

Pent-Up Household Formation

I believe there is a significant shortfall/delay in household formation that is lurking beneath the housing market, compared to what would be expected under "normal" conditions. The natural rate of new household formation is being suppressed, leading to a buildup of potential households that could form once conditions improve (keep reading for how…).

Why do I think so?

Pent-up household formation is often inferred rather than directly measured, using a combination of historical trends, demographic data, and current household formation rates. Here’s how analysts typically approach it:

1. Baseline Household Formation Rates:
   • Analysts establish a "normal" or expected rate of household formation based on long-term trends. For example, in the U.S., the average annual household growth from 2000–2006 (pre-recession) was about 1.35 million households per year, according to Census Bureau data. This can serve as a benchmark.
2. Actual Household Growth:
   • Current or recent household formation numbers are compared to the baseline. For instance, during the Great Recession (2007–2011), annual household formation dropped to around 550,000 per year—a significant decline from the pre-recession average.
3. Shortfall Calculation:
   • The difference between the expected (baseline) and actual household formation is considered the "shortfall." For example, in 2011, the National Association of Home Builders (NAHB) estimated a 2.1 million household formation shortfall from 2007–2010 due to the recession. Similarly, Trulia’s Jed Kolko calculated a 2.6 million "missing households" deficit in 2010, which lingered at 2.4 million by 2013.
4. Headship Rates:
   • A key indicator is the headship rate—the share of adults heading their own households. Declines in headship rates (e.g., young adults living with parents instead of forming independent households) signal pent-up demand. During COVID, headship rate dropped (e.g., from 52% in 2006 to below 50% in 2011, per Census data) and partially recovered by 2023. If 2025 headship rates remain below pre-recession norms (adjusted for age), the gap indicates pent-up potential. For example, Trulia’s 2013 "missing households" estimate (2.4 million) was based on this method.
5. Pent-Up Demand: Current Context
   • Affordability Constraints: Rising mortgage rates (peaking near 7% in 2023) and home prices since 2022 likely slowed household formation again. Young adults (25–34) staying with parents or roommates—a key driver of pent-up demand—may have increased. The NAHB noted in early 2025 that shelter inflation (rents and ownership costs) stayed high at 5.4%, bottling up more potential households.

Current Estimate of Pent-Up Households

Without 2025 Census data yet (typically released later in the year), we can’t yet pinpoint an exact number. However, consider this:

• Pre-2020 baseline: ~1.2–1.4 million households formed / year.
• 2021–2023 average: ~1.7–2.0 million, implying a catch-up of ~0.5–1 million annually.
• 2024–2025 pressures (high rates, low supply) are reducing this to 1.4–1.6 million, leaving a residual pent-up pool.

If economic conditions ease (e.g., interest rates drop to 5.5–6% by late 2025, as NAHB predicts), pent-up demand could be 1–2 million households—similar to post-recession estimates.

And here we are today, with fewer households forming than there should be, we have a geyser of potential households building pressure, stuck in their mom’s basement.

We need rates to keep ticking down.

Relief Could Be In Sight

Home affordability has become wildly difficult in just the last few years.

BUT..

Home prices may be permanent, but your monthly mortgage is not.

Why?

Most of your new mortgage is interest, not principle, and thus as interest rates tick down the monthly cost of home ownership will depreciate. And it will be meaningful.

Interest rates are close to 7% today. As rates tick down to say 5.5% (where I think we will land) that could mean a ~25% reduction in monthly interest payments.

This is REALLY important to understand.

So while home prices are stuck where they are, and will continue to appreciate, 2025 will likely bring mortgage relief!

And let’s be honest, most folks care about/ budget for their monthly costs. Not lifetime prices.

My Skeptical Take:

Once rates tick down...

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-Andreas