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When Will the Housing Market Change?

One day, we will be reminiscing with the next generation about how there was once only a 2.5-week supply of homes for sale. We will tell them how after the once-in-a-century pandemic, the average home sale price increased dramatically. In 2021 alone, prices increased 19%. So if someone bought a house in early January of 2021 and put 20% down, they would have nearly 40% equity in the home by the end of December. Despite how utterly unbelievable that sounds, it happened. We truly lived through a Real Estate History Lesson.

Over the past two years, we’ve gone through:

  • A global pandemic with multiple variants
  • A war
  • Inflation
  • Rising oil prices
  • Never-before-seen demand with the largest pool of buyers in history causing the lowest available inventory since data has been kept
  • The work-from-home dynamic shifting how and where people live and work

Everything homeowners, home buyers, and home sellers have ever known was theoretically thrown up against the wind of a tornado. Now all the above factors are finding a place to land, and everyone is asking:

When will the market change?

The quick answer is it’s already starting to, but we first need to understand WHY this frenzy started:

Low rates, even lower inventory, maxed out demand, and anemic supply remained the name of the game for well over a year until this past winter, when it truly plunged to incredible lows.

Available Inventory

With this frenzy came even more buyers making crazy statements like “the market will crash soon; I will just wait a few more months”. Real Estate prices aren’t like the stock market – they don’t just fall in a day due to a single factor. If you look at history, you will see that it takes years. Locally, we may see a region affected by a single event such as a climate disaster like a hurricane or worse, something like 9/11. But those pitfalls are also typically something that adjust back to working order in a relatively small amount of time. Yes, there are times of the year that homes sell for more, like in the winter and early spring, but the variation isn’t that great.

The national real estate market since 2020 has technically experienced multiple factors over time that could poke holes in its stability, but the main thing that always props up the market is demand. Real estate is a game of supply and demand. As Anthony said back when the pandemic started in our This is Not 2008 blog, you can’t have a housing crash where prices plummet if the inventory of homes for sale is going down. The story will change if we start to see inventory rising far beyond the number of buyers out there. As it stands, inventory nationally is even lower than it was in December of 2021 in the chart below.

What you see in the graph above is national inventory in 2021 at its lowest point, but the story is relatively similar at the state level too. A housing crash on a chart looks like what you see in January of 2005-January of 2007; that spike in available inventory of homes for sale means supply is high and demand is low. Not remotely the current set of circumstances. 

Since early March, about 40% of the homes that are for sale are going under contract within a week.   That means there is a 2.5-week supply of homes on the market. So, if homes stopped being listed, it would take two and a half weeks to be out of homes to sell. This is truly historic and unprecedented because a typical market offers around three months’ supply. The graph below shows the percentage of homes that went pending week by week.

Mortgage Rates

Rates fell to below 3% in August of 2020 to keep buyers buying during the initial stages of the pandemic – a prophylactic put in place by the FED to ensure demand wouldn’t drop, which apparently worked. As a result, buyers enjoyed historically low levels not seen in 50 years while they navigated the continually rising prices.

It wasn’t until March of 2021 that rates climbed back up to over 3%. But at that point, the fuel was already feeding the fire as the FED kept continually flooding the market to prop it up, giving taxpayers credits and keeping money in the economy to perpetuate spending. 3% was still very, very low, and buyers were basically unphased. Demand kept going up, and supply was being consumed as fast as it was made available and even before it was available with off-market sales. 

Now, rates just this past week surpassed 5%. Is this what is going to topple the market somehow??? Right now, we are already seeing signs of buyers who are having sticker shock when they obtain an updated pre-approval at a higher rate. So yes, it’s finally having some impact.

Rates will not go down, and in fact, they will most likely increase more. The FED is working on getting inflation under control. They are working towards selling some of the mortgage-backed securities that were initially put in place to keep the market afloat when the pandemic first hit. This will create competition with new mortgages amongst investors. Believe it or not, this increase in rates is a blessing. Something had to give. With rates continuing to increase and with no end in sight and buyer power being diminished with every rising point, it does decrease buyer affordability and lessens the demand.

This isn’t a forecast for cheap housing. Prices are still predicted to increase by 10% in 2022. Yes, a smaller increase than 2021, but with rates almost twice as high, buying a house will still be as expensive as ever. Buyers shouldn’t wait for a fallout because they will be waiting a long time. We are seeing signs of things moving into a lower gear, but we are nowhere near the bottom falling out.

We will soon start seeing headlines about how sales are down by month when you compare them to the same month last year. In fact, it’s already happening. This is because fewer home sellers are listing their homes for sale year-to-date. The number of homes listed is down about 10%, whereas it was down more like 20% a month ago, so it’s catching up. But decreasing sales doesn’t automatically mean prices are falling. We are still seeing multiple offers on many listings.

Average Prices

Average Prices are still going up. The national average is the highest ever, and until inventory begins to outweigh buyers, they’ll continue to climb. The only way prices will drop is if inventory rises significantly, and that’s not even a possibility in the immediate future. The inventory of homes for sale is still way less than half of what it was in 2019. However, it is beginning to adjust back which is a great thing.

Prices are so high that the market value of homes has increased, and the average house with a mortgage has 55% equity which is also the highest ever. It’s when values decrease that there’s a problem, and values won’t decrease until we’re on the flip side of this and available inventory is much higher.

There are millions of what we call ‘Want to be Sellers’ as they are scared to list because they don’t know where they will go. The idea of selling high is obviously attractive, but sellers are worried that they will sell so fast that they won’t have anywhere to go. Others need to sell first in order to qualify for the mortgage they’d need to buy their next home, but this market isn’t friendly to contingent offers unless you have a rockstar REALTOR ®, which then makes sell/buys absolutely attainable.

So how and when will this market change?
Will it be a crash or more of an adjustment?

As Anthony explained in his Market Update on April 12th, an adjustment is already beginning to happen. It’s sort of like the market is beginning to downshift, which should be welcomed news for homebuyers! Rates being higher has decreased buyer demand as it always does. The pace at which they increased in the last 8 weeks is also having a mental impact on many buyers who are left with sticker shock when they hear what their mortgage payment will now be. So far, we are seeing a slight decrease in demand, particularly on the lower-end homes, but we aren’t seeing dramatically less demand on listings, and that’s because the rapid increase in rates is also causing pause for would-be sellers who also want to buy. In time, as we get to summer and then fall, the sticker shock will wear off, and buyers who can afford it will just pay it, and we will move on. But there is no doubt that there is change, not a crash, on the horizon and everyone, including buyers and sellers, should welcome it. Prices going up as fast as they have over the last two years is just not healthy and really hurts affordability. This is how we see it going:

  • You will see multiple offers continue for a couple more months.
  • Heading into summer, prices will decrease on the lower end, first-time buyers’ houses and condos, and on the higher end.
  • Come summer, sellers who overprice will not sell and will be forced to adjust their price.
  • By the fall when inventory peaks for the year in late September and early October, overpricing will become more prevalent as it always does.
  • When the year ends, prices in 2022 will be roughly 8-10% higher than in 2021.
  • In fall of 2023, the number of homes for sale at a given time will be as high as before the pandemic hit. This will bring more normalcy back into the market.

If you take nothing else from this article, know that we cannot see a crash happening anytime soon. Even if mortgage rates were to get to 10% and the economy falls out, borrowers will still be able to make a smart exit without the need for a short sale or foreclosure due to the record equity on their home. There’s no doubt there will be an adjustment, but not a crash anytime soon. We are in our first steps back to a pre-COVID real estate market, and it’s wonderful to see.