Late last year, Zillow said home prices needed to fall about 25% to become affordable again, and around the same time, mortgage rates hit a 20-year high, with a steady 30-year rally above 7%. Relief looms, at least if you’re a potential home buyer, inferred. Indeed, house prices plummeted soon after, falling 3.3% in March, according to Redfin, the biggest annual decline since 2012. But that was then and that. now. In May, home prices hit a new all-time record. What is happening on earth? Just look at this infographic from FHFA, which oversees Fannie Mae and Freddie Mac. Home prices were already past the peak of the previous housing bubble before COVID-19 reared its ugly head, but just look how far they have risen from 2020 onwards. This explosive growth worried the Federal Reserve, which was also dealing with out-of-control inflation. And it led to Federal Reserve Chairman Jerome Powell’s call for a “reset” of the housing market, which he believes can be achieved with countless interest rate increases. , it has already led to a massive spike in mortgage rates, with the 30-year rate doubling from the low range of 3% to over 7% by late 2022. Ultimately, this has led to a decline in home prices, with some reporting that on It is the second largest home price correction in the post-World War II era. The problem is it didn’t last long and if you think about how much house prices rose before the correction it’s a drop in the bunch yeah some areas of the country did worse than others but most markets across the country have proven quite resilient where there is Plenty of bears in the housing sector, renters, potential buyers, and economists in general are at a loss, wondering why housing prices aren’t falling. Housing shortage continues to be one of the major themes in the housing market since prices sank to their lowest levels in 2012. It was in short supply, and hasn’t changed much since then. In fact, by some measures, the housing stock has worsened. For example, Redfin reported last week that supply months were just 2.6 months down, near its lowest in a year. Similarly, Black Knight notes that inventory for sale has improved “modestly,” but remains down 51% from pre-pandemic levels. In general, a four to five month period is considered to be a balanced market, with supply falling in favor of sellers as opposed to buyers. Since the 2010s, this is generally due to underbuilding. Exacerbating this shortcoming is what is called a rate-fixing mortgage. Simply put, most homeowners have 30-year fixed-rate mortgages capped at 2-3% (or even as little as 2%), which makes them efficient for their foreclosure. This is either because they can’t leave (due to lack of affordability) or because they chose not to (they don’t want to buy a replacement home with a 7% mortgage). Enough homes on the market, even though the demand from buyers is down, yeah, the demand is down too, as the Fed predicted, due to higher mortgage rates. House prices are still high, but since supply is also very low, with active listings down 12% year-over-year, lower demand is not enough to bring house prices down, and that’s an important thing to highlight because the housing market is not. t particularly hot. It’s just a lack of supply that keeps things together, but affordability has never been worse Those critical of high home prices have pointed out historically poor affordability, with exorbitant asking prices and high mortgage rates requiring an amount $2,258 per month in principal and interest payments. On a median-priced home with a 20% drop and a 30-year mortgage at 6.67%, it’s the highest payment on record according to Black Knight, and significantly higher than levels seen just a few years ago. % of the average income is required to buy an average home, which is clearly too much. Black Knight indicated that we would need a 30% drop in house prices to return to “normal affordability”. The alternative is income growth of 19% if home prices remain flat and mortgage rates fall to 5%, meanwhile house prices are simply too high from an affordability standpoint, which explains weak demand, but since supply is still Restrained, home prices are defying expectations and coming in at an impressive 0.7% month-over-month gain in May, which could put the annual estimate close to 9% again, which seems absurd given the high mortgage rates currently on offer. . Both can go up or down together, for example, the economy can fall into a recession, driving down mortgage rates while also driving down real estate values, or the opposite can happen. A strong economy, similar to the one we’re living in now, can raise interest rates and house prices along with that, in other words, you need a catalyst to lower house prices, like massive unemployment, which has yet to materialize. Some housing markets are doing worse than others While national home prices appear to have resumed their upward trajectory, after a very brief pause, not all housing markets are performing the same, and the worst right now is Austin, Texas, where prices are stalled a significant 13.8% from their peak. . Interestingly, “inventory there continues to rise above pre-pandemic levels,” which might sum up the situation on a national level somewhat. Where inventory hasn’t fallen (or worse, gone up), home prices are under pressure, which makes sense given affordability issues, but according to Black Knight, active listings so far this year are down 95%. of major metro stations and remained 50% below pre-pandemic levels. Seattle and San Francisco rebounded again as their stocks swung from oversupply to undersupply, and this may explain why house prices haven’t fallen, even with mortgage rates at 7%. Determine where home prices go next.
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