Written by Breck Hapner
The current state of the 2022 housing market is in flux due to multiple factors. That being said, due to slightly expanding inventory and eventual lower pricing, the situation seems to be shifting in favor of buyers. This is a bright spot in the housing market that we will discuss.
In the past two years, on a global scale, we have weathered a pandemic that continues to affect the prices of every commodity and service.
What happened? The federal government stepped in to provide billions in COVID benefits to U.S. citizens. Russia started a war, and the U.S. has provided Ukraine billions in relief. Spending became a huge economic issue. The ability to ship goods became problematic. Supply chains broke down or were slowed considerably. Vendors worldwide had to raise prices in order to continue operations. And those increases were passed on to the consumer in the form of rampant inflation.
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All of these factors, combined, have created a “perfect storm” in every sector of the housing market, with inflation bringing uncertainty as well as devaluation. Supplies are limited, and demand is high, but the dollar is weaker. Buying power is decreasing, profits are drying up, and the capacity to provide essentials at a reasonable cost is diminishing.
As we all know, the Federal Reserve stepped in to slow down the economy by increasing the difficulty to borrow money. That is, by making it more expensive to borrow. The idea here is less financial activity will occur, curbing demand, and slowing the rate of inflation, which is 8.2%. So, the Fed has begun a fiscal policy meant to reduce inflation by raising benchmark interest rates, which also increased mortgage interest rates to nearly 7%. This economic tightening is currently squeezing the real estate market.
How? Well, Fed chairman Jerome Powell is throwing cold water on a hot market, locking many homeowners into their current circumstances. In other words, the buying and selling of real estate are going to be restricted to some extent. Why? 90% percent of property owners got their mortgage at less than 5% interest. Two-thirds have mortgages below 4%. It is unlikely those folks will sell or borrow at the current 6.3%, because it doesn’t seem logical. They would be taking a loss on their investment.
In a September press conference, Powell was asked what he meant when stating the housing market would “reset,” to which he replied that real estate would experience a “correction” that will create a more “balanced” market for buyers and sellers. Some of the evident fallout: we are not seeing inventory increasing (yet) which is detrimentally affecting the supply-demand balance. Home prices are beginning to fall, and in some regions they are increasing. There is an inherent irony here. Due to the Fed’s actions, the Consumer Price Index continues to rise because of housing.
There are still financial monkey-wrenches in the works, causing indecision. Two years ago, the average home listing price was $375,000, with a 3.11% 30-year mortgage. Goldman Sachs (GS) reports that average home prices are now $525,000 with a 7.06% interest rate on that all-too-important 30-year mortgage.
In the presentation “Assessing the State of the Housing Market,” Realtor.com’s manager of economic research, George Ratiu, stated “A household earning the median annual income of $71,000 and using a 20% down payment could afford a home priced at $448,700 in January 2022 when rates were 3.1%. In contrast, at a 7% mortgage rate, the same household can only buy a $341,700 home.”
Are home prices and interest rates going to drop in the foreseeable future? Within the past two years, the housing market was buried with extreme demand and minuscule supply, leading to huge price hikes. However, according to GS, home prices are expected to hold up over the next 12 months, but if buying a home, it is best to purchase soon before interest rates inflate further. GS also stated that home prices would begin to fall because the Fed has raised interest rates. We are seeing this happen now.
Although the housing and stock markets have been battered, unemployment is low, and consumer spending remains high. Recent home market predictions from sources such as CoreLogic indicate that housing inventory will modestly increase. This is because current homeowners want to sell in case a recession does occur, which would lead to greater losses. Another fact is new builds increased 13.5% in September because contractors were finally able to get needed supplies to finish pending developments. This will put more properties on the market, and buyers will have more bargaining power because of enhanced inventory.
There are differing opinions among experts whether or not mortgage rates will continue to climb in November, but the initial shock to home buyers and sellers is wearing off. Inflation is seen from one angle but recession is viewed in a completely different way. Although the average 30-year mortgage recently rose slightly above the previously-mentioned 6%, Corelogic and GS both find it unlikely interest rates will top 7%.
So, with a ceiling at least, buyers and sellers can now move forward with some semblance of confidence, knowing the present hard-won economic stability will last throughout 2023. And it is better to act now if prices and rates do swell, especially if a recession does happen.
However, industry sources are all in agreement that during October, the housing market has seen a drastic drop in home prices. This is due to high interest mortgage rates. The result has been home prices falling monthly since August, according to realtor.com, when examining data presented from The S&P Corelogic Case-Shiller Index. Therefore, in an effort to stay competitive, and actually move properties during the recent upheaval, sellers are lowering home prices.
The overall effect is home prices will drop considerably in order to even out higher mortgage rates. This will also increase available inventory. Sellers will drop prices, and buyers will invest, despite higher rates.
So, believe it or not, this is good news. With more available inventory, home prices will come down even further, no matter what economic circumstances arise. The numbers show the market is still resilient, even if it is expensive. More inventory exerts a corresponding downward pressure on prices. It is important to view these numbers as a sign the housing market will rebound to a degree in November.
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We will revisit the status of the housing market this month, in part two of our series.
As always, stay tuned to Haven for further housing market articles and insights.
