One of the challenges with economics and business cycles is we usually do not know where we are in the cycle until it is the rear-view mirror or in hindsight similar to real estate taxes being paid in arrears.
While readers of my blog know I have been predicting a softening of the real estate market for many months now, indicators have proven me wrong yet…….with mortgage rates now topping 5.5% concerning a conventional mortgage coupled with continuing rising home prices more pundits believe we are heading towards a correction if not already in one.
Many anticipate home prices will flatten, or even go down a bit, in certain markets.
While new home sales have already been dropping; fewer buyers are seeking mortgages because they are challenged with the increase in interest rates, the higher-asking prices for homes and the immediate impact of inflation (inflation has hit a 40-year high, gas prices have spiked, and rent levels are nationally hitting new highs as well).
Here in Denver I am witnessing a slowdown including fewer if there is even a bidding war, expanded days on the market, homes returning to the market, price reductions and Zillow Estimates based on past sales while asking prices well below the Zestimate.
For those who remember the last housing crash which started in late 2007 with the implosion of Lehman Bros coupled with questionable mortgage investments, then like now the market was on a seemingly never-ending trajectory.
Consider the following, the median home list prices in America hit a new high of $425,000 in April 2022—up 14.2% in just one year, according to the most recent Realtor.com® data. Meanwhile, average mortgage interest rates had climbed to 5.25% in the week ending May 19. That's a 75% increase in a year's time. One does not have to be an economist to understand there is a divergence here that is not sustainable. Yet in more laymen terms: new buyers would be paying about 50% more for the same home compared with a year ago concerning their monthly mortgage outlay.
While a Bubble has probably not formed due to the following:
- -The overall housing market is still deficient of inventory.
- -Millenials are at the age and lifecycle to consider purchasing a home.
- -Lenders are much more selective concerning mortgages and who is qualified to borrow.
The reality is the housing market generally moves through cycles and while The Great Recession may have been an anomaly concerning the subsequent downdraft one could argue the price expansions witnessed over the past decade are probably an anomaly as well fueled by inexpensive borrowing costs i.e. cheap capital and an equities market that may have been trading way above its historic norms leading to the wealth effect.
At present homebuyers, especially first-timers, are feeling the pain. In the past two years, prices have risen 32.4%. With higher prices come higher down payments meaning the % down payment. Add to this the impact of inflation and steep drops in the stock and cryptocurrency markets the later favored by millennials we are in for choppy waters ahead.
While statistics are in the rear-view mirror we know that mortgage applications for the week ending May 13thdropped 15%+ year over year.
Existing homes sales dropped 2.4% in April 2022 and down 13% for new home sales in March 2022 (where prices continue to increase due to inflationary and supply-chain pressures).
Again add inflation at a 40-yr high and even if transitory the impact is felt daily for many and especially for those considering their 1st home purchase.
When will the hammer fall? That is anyone's guess. Home prices have yet to catch up with the immediate realities of today's housing market. Median list prices were 15.9% higher year over year in the week ending May 14. The disconnect is likely because many buyers locked in their mortgage rates knowing forecasts had predicted rising rates.
Yet many buyers might not realize they no longer qualify for as much money as they did when rates were lower or how much higher their monthly payments will be and why some are moving to adjustable-rate mortgages to compensate.
Yet sellers are still seeing record sale prices as contracts may have been signed months earlier and thus are reluctant to accept that demand Is weakening, and price appreciation is static and may trend downward.
Of note in April 2022 price cuts on listed homes were up 12% year over year which while not a great indicator does advise the irrational exuberance of seller's expectations may be adjusting to the new reality. I like many of my peers do not believe there will be a crash; instead a flattening of the price curve and in some markets the possibility of a more severe downdraft.
Reality is this the year is 2022 not 2008. Due to more stringent lending requirements, a move away from speculation and a string underlying economy the past downward pricing pressures of foreclosures and short-sales are probably not in our immediate future. Yes we may have learned from our collective mistakes yet as I also argue history tends to repeat itself.
From my 30+ years of experience concerning primary markets the first homes that show signs of a stressed market is the upper-end, the luxury homes. Due to their pricing the buyer-pool is limited and if inventory expands pricing pressures could become evident. At this price-point buyers desire perfection, attention to detail and have the resources to wait out the market.
I would also keep an eye on the 2nd/Vacation home market. This is a market that exploded during Covid coupled with the belief that such homes can cash-flow if needed via transient rental. My orientation on this matter is 1) while Covid is still with us I assume there will be a return to the office trend 2) concerning vacation rentals there Is already a glut with some resort areas placing licensing requirements and restricting inventory. While 2nd homes are a discretionary purchase if this market begins to show signs of weakness or available inventory increases such trends eventually move to primary markets.
The one major positive sign is there are more homes for sale. There were nationally 5% more homes were on the market in the week ending May 14 compared with a year ago, While 5% may sound trivial, it was the first time there has been an increase in housing inventory since the end of June 2019 (pre-COVID-19).
The message of the blog, we may be moving towards a more rational market which is truly beneficial to all.
No comments:
Post a Comment