After a tumultuous summer for real estate, autumn is nearly here. As of mid-September, the benchmark 30-year fixed-rate mortgage average is hovering just north of 6 percent, and skyrocketing home prices are finally starting to drop, and in some area literally tumble.
Here are our prediction on which directions the housing market will head in as the leaves start to change.
The Housing Market Is About to Be Hammered
That’s a tough opening statement and it’s meant to get your attention. Here is how the pros back that up.
The market seems to be cooling dramatically, and Rick Sharga, executive vice president of market intelligence for ATTOM Data Solutions, says the signs are undeniable. Case in point: July marked the seventh consecutive month in which existing home sales were lower than the month prior — down 20.2 percent year-over-year and 5.9 percent from the previous month, according to the most recent National Association of Realtors data.
The housing market has made a remarkable recovery from the start of the COVID-19 pandemic. Prices have surged nationally year over year most months by 20%, according to the carefully followed S&P Case Shiller price index. The rise was fired by low interest rates and the mobility of Americans helped by the “work from home” economy. Those days may be over, as the housing market moves onto shaky ground.
He notes that this decline is almost entirely due to the impact that increased mortgage rates have had on affordability. Purchase loan applications are running about 23 percent lower than they were at this time a year ago, according to the Mortgage Bankers Association.
Kenon Chen, executive vice president of corporate strategy at Clear Capital, agrees with Sharga’s assessment. “Clear Capital’s August Home Data Index Market Report shows almost a 5 percent slowdown in home price appreciation compared to July,” he says. And inventory has risen steeply, with the number of active listings we haven’t seen since July of 2020.
Home demand has begun to be undermined, primarily because home mortgage rates have jumped above 6% for the first time in years. Increasing rates have made mortgage payments nearly two-thirds, 63%, more expensive than the same time a year ago and more than three-quarters, 78%, more expensive more than two years ago.”
This makes buying a home now well beyond the financial budgets of many of America’s potential home buyers.
Home values plunge in some cities as mortgage rates rise.
Seattle dropped about 9(x) the national average.
The typical home value dipped 0.3% nationwide from July to August and 0.1% from June to July, Zillow said in a report this week. It is the largest monthly decrease since 2011. Los Angeles, Sacramento and San Francisco in California experienced some of the sharpest decreases, with each city recording a 3.2% or higher drop. Salt Lake City, Utah, and Seattle, Washington, also saw steep declines of 2.6%.
Residential real estate values are falling in those cities because they've "hit an affordability ceiling," Zillow senior economist Nicole Bachaud told CBS MoneyWatch, adding that "demand is pulling way back."
Are we headed toward a housing bubble?
A housing bubble is often described as an unsustainable span of home price growth caused by factors like speculative buying and loose underwriting. Of course, the word “bubble” suggests an inevitable “pop.” Is that what the current market is destined for?
“The housing market today is not driven by loose lending standards, sub-prime mortgages or homeowners who are highly leveraged,” says Odeta Kushi, deputy chief economist at First American. “The house price appreciation in today’s housing market is supported by the fundamentals and characterized by a shortage of supply relative to demand. That demand has primarily been driven by millennial first-time buyers aging into their prime home-buying years, rather than fix-and-flip investors.”
In other words, there is no housing bubble.
Ralph DiBugnara, president of Home Qualified, echoes those thoughts. “This is not a housing bubble,” he says. “Yes, there has been a huge demand, but banking regulations post-market-crash are much more restrictive, and have stayed that way. So today’s buyers are more qualified to purchase and sustain their investment, which means fewer foreclosures. Also, the supply of homes for sale could take years to get to normal levels. So even if there is a selloff, it won’t be a fire sale at discount prices.”
Count Chen among the doubtful, too. “At a fundamental level, the labor market remains strong, loan delinquency is historically low, and supply is only 57 percent of where we were at the beginning of 2019 — without a major economic shock, a bubble still seems unlikely,” he says.
Who bought houses in 2021?
It’s helpful to take a closer look at who purchased properties last year, which may provide clues as to which generations may buy a home this fall and beyond. Here’s what we know, based on National Association of Realtors data:
% of 2021 buyers
Median age in group
Gen Z: 21 years and younger
Younger Gen Y/Millennials: 22 to 30 years
Older Gen Y/Millennials: 31 to 40 years
Gen X: 41 to 55 years
Younger Boomers: 56 to 65 years
Older Boomers: 66 to 74 years
Silent Generation: 75 to 95 years
Current supply and demand
In many areas inventory is surging. In Seattle for example the local MLS was down to around 3,000 homes for sale just back in March of this year. Today there are nearly 10,000 active listings. Interestingly, the increase in inventory levels is only partly due to a higher number of properties being listed for sale. A lot of it is because properties are taking longer to sell once they are listed. Many buyers are holding off in the hopes that prices — or mortgage rates — will drop further.
In addition, the pandemic uncertainty that has roiled the real estate market over the past couple of years still lingers. Some homeowners want to stay put due to economic concerns, knowing they might struggle to find a new place. And some don’t want to give up their locked-in low rates by selling. “Homeowners with sub–4 percent mortgage rates are opting to stay put rather than buy a more expensive home with a 6 percent mortgage rate,” Sharga says.
Short Sales and Foreclosures aren’t coming back like in 2008.
When the housing sector crashed back in 2008, the reasons were multifold: foreclosures, defaults, predatory lending, irresponsible speculation in the market. Thankfully, today’s mortgage borrowers are more responsible and cognizant of the risks that come with incurring mortgage debt. Tighter lending standards and better fiscal discipline have resulted in buyers steering clear of homes they can’t afford. And a strong job market means borrowers can keep making their payments.
“Foreclosure activity today is at only about 50 percent of where it was before the pandemic, and mortgage delinquency rates are lower than usual as well. There is no new foreclosure crisis anywhere on the horizon,” says Sharga. “It’s also unlikely that we will see a meaningful increase in the number of underwater borrowers. Homeowners have a record amount of equity today — nearly $28 trillion — and a modest decline in home prices won’t affect very many of them.”
Warning signs of a market crash
Experts concur that we are not in a housing bubble currently, nor is a housing crash on the horizon. Still, it’s good to know the red flags that signal a potential market crash, including:
- Increasing loan-to-income levels
- Overpriced properties that outpace affordability, inflation and economic fundamentals
- Higher mortgage rates
- Lower economic growth
- Escalating mortgage balances
- Climbing subprime mortgage loan numbers
“Barring some new, unforeseen global catastrophe or a disastrous recession, there is almost no chance we will see a housing market crash in fall 2022,” Sharga says.
As the Fed has already signaled intentions for another rate increase in November and possibly December as well, the fall housing market is fairly easy to predict.
Buyers will be looking at rates around if not over 7% by the end of the year.
Inventory which naturally lowers over the Holiday season will remain near current levels as homes sit longer.
There appears to be little worry of a foreclosure or short sale bomb as tighter lending practices over the past decade along with massive appreciation over the past several years have left few homeowners truly “Underwater” on their mortgages.
And there may be some new life to the market come Spring!
By March of 2023 we may very well see rates start to drop below 6% to around 5.5%. (Yes that same number that stopped people from buying a few months ago will feel like a blessing after 7% rates have made an appearance.
Inventory levels will come up so buyers will have more options.
Prices will have come down thanks to the combination of higher rates and also all of the added inventory.
So well poised agents, Buyers and Sellers may reap the benefits of nice “Spring Thaw” to the housing market.Cary W Porter on