As we move further into what is traditionally the busiest time of the year for real estate, is the market starting to cool down?
There seems to be a sense that things are changing, but what exactly does that mean?
This month’s real estate market update will focus on four main areas;
What the latest data says about a bubble or whether heading for a crash
The latest home price forecasts for 2022 and beyond
Mortgage rates - are they expected to keep rising
Have rising mortgages and home prices made homes unaffordable
Watch the following video, or continue reading below, to learn more about these four areas and how they impact you if planning on buying, or selling, a home;
Housing Bubble 2.0
While there are plenty of reports, news articles, and videos, with headlines about doom for the housing market, there are actually very few that provide any evidence or proof.
Granted, nobody knows for sure what is going to happen going forward, but many of these headlines are based more on fear than fact. There seem to be an increasing number of comparisons between now and 2008, but the facts just don’t add up. I know many will disagree with me, which is fine, but I’d personally like to see more than just an opinion.
My goal each and every week is to share the latest facts and figures so that you have the information you need to make the decision that’s best for you. When I look at the facts, and the latest numbers, I don’t currently see any signs of a bubble or a crash. Could we have a softening of the market in certain areas of the country, absolutely, but a crash, I don’t think so.
The rapid price appreciation, multiple offers, and bidding wars didn’t appear until after the Covid lockdowns were lifted. It’s pretty ironic that the event many predicted would cause a housing market crash, actually caused the housing market to take off.
If you’ve seen any of my previous videos, or blog posts, you’ll know the run-up in prices has primarily been caused by the imbalance between supply and demand.
Too Many Homes Are Being Built
Last week, I saw a video that stated our current “bubble” was going to burst because we were building far too many homes and the lack of supply would quickly turn into an oversupply resulting in plummeting home prices.
Are we currently building too many homes? Take a look at this headline;
Housing Boom Turns to Bust and Threatens a Crisis
Here’s an excerpt from the article;
More houses were built last year than any other year in history — 2,378,500; in 1973 there will be only 2,046,000 new homes, down 14 percent; in 1974 the estimated number is 1,600,000, down almost 22 percent.
Yes, the dates are correct. The article is from The New York Times - December 31, 1973
The article goes on to say;
This boom‐to‐bust decline threatens a crisis for a nation that needs a minimum of 26 million new houses by the end of 1977. This was the demand delineated in the 1968 Housing Act.
As a comparison, here is a screenshot from a Census Bureau article on April 19, 2022
There was concern in 1973 because only 2,046,000 homes were built, yet 1,793,000 housing starts as of March 2022 will cause us to be oversupplied?
This oversupply is going to happen even though fewer homes are being built than 50 years ago and the largest generation in history, Millennials, are reaching prime home-buying age?
Here is how new home construction has changed annually going back to 1970;
As you can see, the supply problem didn’t happen overnight but has been years in the making. Last year marked the 14th consecutive year that new construction has been below the 50-year trend line.
Even though new construction is ramping up, a recent report from Realtor.com said we need an additional 5 million properties to come to market to ease the supply crunch we are currently experiencing.
Where Do We Go From Here
In order to bring balance back into the market, we need to see an increase in supply, a decrease in demand, or a combination of both.
There are only 3 ways more supply can come to market, new construction, foreclosures, and resale homes. New construction continues to ramp up, so what is the likelihood we will see foreclosures or existing homes come to market?
Foreclosures
Many believed the economic downturn as a result of the pandemic would result in a foreclosure crisis worse than 2008, but that isn’t, and won’t be the case.
The brunt of the unemployment that occurred impacted the service sector and people who were more likely to rent than own a home. Of all the mortgages that entered forbearance, 92% have now exited the program. 37% of those loans never needed forbearance and are either current or now paid off, 44.6% have completed a repayment plan or loan modification, and 18.4% remain in trouble, but based on equity gains over the past couple of years the majority of those homes could be sold traditionally and all obligations cleared.
As a result, foreclosure activity is near all-time lows.
Even though there was a foreclosure moratorium in place last year, which reduced the number of foreclosures overall, there would need to be an awful lot of foreclosures to get to the number we experienced before the pandemic.
Resale Homes
New resale inventory coming to market has faced a double challenge.
First, when the pandemic hit, homeowners were reluctant to list their homes for sale and have potentially infected strangers walk through their homes. As fears eased, homeowners were faced with the reality of not having anything to buy if they did sell.
Now, as inventory is slowly starting to rise they are facing a new challenge. Why sell a home with a mortgage rate at, or below, 3% to buy a home with a mortgage rate between 5% and 6%.
There are plenty of reasons beyond mortgage rates people buy and sell homes, so this won’t eliminate all resale homes coming to market, but is likely to reduce the number.
Home Prices
One thing that just about everyone can agree on is the fact homes cannot continue appreciating at the pace they have been for the last couple of years.
As supply continues to increase, and demand decreases, especially in the low end of the market, home price appreciation is expected to moderate in the years ahead, but not go negative.
Here are the latest expert predictions on average national home price appreciation through 2026;
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Mortgage Rates
When the Fed raises interest rates, are mortgage rates affected?
Contrary to popular belief, mortgage rates are not directly tied to the federal funds rate. When the Fed raises interest rates credit cards, car loans, personal loans, home equity lines of credit, adjustable-rate mortgages, and savings rates are all directly affected. 30-year mortgage rates are more closely tied to the 10-year Treasury Bond yield.
While mortgage rates have climbed higher and faster over the past couple of months than anticipated, it is widely believed that current mortgage pricing includes future economic performance, unless something unexpected happens with inflation or in the world at large.
I have also seen a few reports suggesting mortgage rates could actually settle back in the mid 4% range next year if inflation is brought under control and the economy doesn’t experience a sharp recession.
Affordability
One reason given for a potential crash in the housing market is affordability. The argument is that home prices, and mortgage rates, have risen so much that homes are simply no longer affordable. The lack of affordability will undoubtedly diminish demand which, coupled with increasing supply, will cause home prices to fall.
The logic behind the argument is sound, but it’s not supported by current market data.
As mentioned above, the rapid rise in prices has primarily been driven by the imbalance between supply and demand. Ultra-low mortgage rates, as a result of the pandemic, drove demand even higher and put further strain on an already undersupplied market.
For the most part, the low mortgage rates helped offset price gains and keep homes very affordable, but now that rates are rising, affordability has become a bigger question.
While it is absolutely true homes are less affordable than they have been, does that mean they are unaffordable?
Historically speaking, no, as shown on the following graph;
The higher the bar on the graph, the more affordable homes are considered to be.
For many, especially those looking to purchase their first home, affordability has become an issue as homes are less affordable today than in any year going back to 2008. However, homes remain more affordable than any year between 1990 and 2007.
If home price appreciation doesn’t moderate as expected and mortgage rates move higher, then affordability will become a bigger issue for the broader market.
Bottom Line
Social media and YouTube are great, but they have also made it easier than ever for people to voice their opinion, and we all know that everyone has an opinion😀
The question you have to ask when watching a video, or reading an article, is if the opinion is just an opinion or is data being provided to support the opinion being given?
Obviously, all data is subject to interpretation, but my hope is that the information provided here is enough to help you make the best decision for you and your family.
Going forward I do expect we will see changes in the real estate market. How big those changes are will depend on where you live.
Overall, I would expect the market to slow and become more balanced as inventory rises. The good news for buyers is you won’t have to face as many bidding wars and multiple offer situations. Days on market will increase and some sellers, who were a bit optimistic in pricing their homes initially, will have to lower their price before receiving any offers.
We are already seeing this in Southern California, while the market here in North Texas continues to show few signs of a slow down.
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If you have additional questions, or a specific situation you would like to discuss in more detail, please don’t hesitate to reach out. You can reach us at 469-296-5230 or email Contact@S2RealEstateTeam.com
