The New Hampshire housing market can take solace in the fact that it is not alone.

The American Enterprise Institute’s (AEI) recent conference on housing made one thing clear: The entire country is experiencing issues with housing due to high interest rates, low supply, and rising home prices.

“Last year, rates were raised from three percent to over seven percent in just 10 months. And that is the fastest growth rate ever seen since the 1980s,” said Sissi Li, senior data and analytics manager at the AEI Housing Center. “This year, rates have been bouncing between six and seven percent for the most part, but recently it is reaching back up, and on October 19, Mortgage News Daily reported a daily rate of over eight percent.”

According to Mortgage News Daily, today, the 30-year fixed mortgage rate is inching toward eight percent.

“So, basically, we went from a historically low rate to a historically high rate in less than two years.”

While the Federal Reserve’s goal is to cool the economy and stop the surge of inflation, its actions have also made it very expensive very quickly for people to borrow money and buy a home.

“As the rates start moving higher, the purchase volume also dropped by over a third to 230,000 loans in July of 2023,” Li said. “We expect the purchase volume to decline further as rates inch higher. For the mortgage industry, things will almost certainly get worse before they get better.”

In other words, sales are way down.

This is definitely true in New Hampshire. September 2023 saw a 30 percent drop in residential sales compared to September 2022, according to the New Hampshire Association of Realtors (NHAR).

Beyond just the mortgage rates, AEI’s panel noted the housing inventory is also historically low.

This is an issue that hits home in New Hampshire, a state in the midst of an extreme housing shortage. To stabilize the housing supply, the Granite State currently needs upward of 23,500 units.

Based on expected population growth, the New Hampshire Housing Finance Authority estimates the state will need to build about 90,000 more housing units by 2040.

With limited housing supply and borrowing being so expensive, the result is an affordability problem. The median home price in New Hampshire is up to $490,000.

The monthly median price has been increasing for 43 consecutive months as of September (since February 2020). And for the second straight month, the affordability index sits at 59 — both an all-time low and a 15 percent drop from one year ago.

The monthly median gross rent for two-bedroom units in the state is $1,764.

Moreover, the state’s vacancy rate for rentals is 0.8 percent. For context, a healthy market vacancy rate is typically five percent.

So, how can a state like New Hampshire get out of this quagmire? “Generally, there are three ways to replenish supply,” Li explained. “One is, of course, through building more homes. Number two is through mass foreclosure. Number three is, in the case of entry-level supply, for people to move out of their homes and free up their existing housing stock.”

The AEI panel saw no signs of mass foreclosures anytime soon, and it explained that people aren’t moving out or selling right now because of the low interest rates they are locked into from years prior.

One of the many distortions the Federal Reserve has created, Edward J. Pinto, co-director of the AEI Housing Center, explained, “is they have locked in tens of millions of people with interest rates that are below four percent, and therefore those potentially move-out buyers aren’t moving up. They’re basically frozen in place because they don’t want to give up the low interest rate.”

“So, it looks like our only hope is through building more homes,” Li concluded.

But, as many in New Hampshire well know, that is easier said than done. Li and the panel acknowledged that not enough housing is being built across the United States, and it is especially difficult to build in the Granite State with municipalities’ restrictive land-use regulations and zoning laws. (Just look at the findings from the NH Zoning Atlas.)

In addition to supply, AEI’s research identified another factor behind home price appreciation. According to Karl Schneider, senior data analyst at the AEI Housing Center, “The key takeaway…is that absent other factors such as differences in leverage, variations in new supply and total wages had the biggest impacts on home price appreciation.”

Housing prices, like other prices, are driven fundamentally by supply and demand. So, as Schneider explained, “A metro can tamp down home price appreciation by increasing its housing supply to better keep pace with wage growth.”

That rings especially true for a city like Manchester. Only 33 percent of the buildable land in Manchester and neighboring towns is open to new single-family homes (after accounting for existing development, vacancies, and growth potential). Just 21 percent of the area’s buildable land allows single-family homes on small lots. This drops to just 7.8 percent when considering only vacant or underdeveloped space.

Meanwhile, two-family and three-family housing is permitted on only 18 and 17 percent of Manchester’s buildable land, respectively.

According to AEI’s research, opening up a growing city like Manchester to greater housing development would be a rational and effective way to counterbalance demand and help improve affordability.