Let’s look at the first signs of the demand for high priced houses collapsing and how much of it is location based around the U.S.
Is the housing market in a recession?
Most home builders and mortgage brokers say that we have entered a housing recession.
Here’s what they are seeing:
Higher mortgage rates are causing a slowdown in new mortgages.
Supply chain issues have continued to keep new construction costs high.
Labor shortages have also lead to building new homes being expensive.
Commodity costs were high for a long time leading to higher new home prices and replacement value caused older homes to increase in value and this increase in prices has finally run out of demand in the marketplace.
Sales activity has declined for six consecutive months.
Many new home building contracts have been cancelled.
Housing prices have started to decline sharply in the previous hottest U.S. cities.
There have been many reductions in prices for listed houses across the country in many markets.
Homes for sale have even been taken off the market due to sellers not wanting to accept these lower prices.[1]
This doesn’t mean that we could see the same type of housing crash as 2008 as this is a very different environment this time. There is not the same level of no income, no job (NINJA) loans being given out this time. Also there is not a big oversupply of houses in 2022. However, the signs of a drop in sales, construction, prices, and sentiment show an obvious top in the housing market and a decline in the industry.
Consumer sentiment toward housing fell to the lowest levels seen since late 2011, as measured by the Fannie Mae Home Purchase Sentiment Index (HPSI). The index dropped 2.0 points to 62.8 and is 13.0 points lower than the same time last year. [1]
What caused the crash of the housing market?
A crash in home prices always comes down to the dynamics of supply and demand.
The demand side was fed by people moving during the pandemic to either seek a new city or state more aligned with their political beliefs or they were no longer location dependent if they were able to work from home permentantly. This led to a great migration around the country with many cities and states benefitting from movers especially cities like Boise, Idaho and states like Florida and Texas.
The mass movements created some big overpriced bubbles in many major cities with home prices surging double digits in prices for months and some homes ending up 30% to 50% or more in price in less than three years. With the moratorium on not evicting renters that did not pay during the pandemic this lead to a lot less available apartments on the market and a supply crunch leading some people to just buy homes in cities with housing shortages already.
Another demand side problem that ran prices higher were investment firms like BlackRock buying up houses in residential areas as investment properties and rentals. The easy monetary policy of the Federal Reserve also made it very easy for these companies to borrow and buy homes running up prices and outbidding people. Also businesses like Zillow, Redfin, and Opendoor got into the business of buying homes with some using algorithms to sometimes overpay with the strategy of flipping the house for a profit in the hottest real estate markets.
This was of course in addition to the low interest rate policy by the Federal Reserve that made mortgages cheap. The demand side was driven to much and the supply side just could not keep up with new builds in places people wanted to live.
This all happened to cause prices for homes to run too far and too fast creating a bubble far above the historical movement of home prices in the U.S.
Current data indicates that the housing market is seeing its biggest decline in almost 20 years as home sales hit their lowest level in 7 years. Existing Home Sales data showed a drop of 5.9% in one month from June to July and a 20.2% drop from the same period one year earlier, this is the sixth consecutive month of decline.[3]
This sales data shows that prices finally reached enough to curb the demand side as supply came onto the market with prices reaching a level sellers were willing to list for. Active listings for many major cities have more than doubled over the past year helping the supply side lower prices with many homes needing to be reduced to even receive offers.
Lack of buyer demand has caused this recent housing price drop. Year-over-year, new-home sales and existing-home sales are now down 17.4% and 20.2%. Single-family housing starts and mortgage applications in July were 18.5% and 18.4% below levels from a year ago. One-fifth of housing activity just ended. [4]
The demand side losing almost 20% of buyer interest caused the crash in demand.
Here are the 10 cities with the biggest share of price cuts among listed properties in June, according to Realtor.com.
Home prices in July 2022 did fall month-over-month for the first time since December 2018. We can see that the magnitude and momentum of house prices has stopped moving higher increasing the odds of a top for the housing market being in for the most speculative markets.
The year-over-year rate of national home price growth—which was 19.7% in May—decelerated all the way to 2.4% in July showing the annual growth returning more to normal and even underperforming the 8.5% U.S. annual inflation rate. These are signs of a reversal in housing prices.
The price trend for homes for the remainder of 2022 will be very location dependent.
The macro movers of home prices in supply, demand, mortgage interest rates, and the overall economy.
The micro movers of home prices in housing supply, population trend, demand from homebuyers wanting to live in a specific city or state, and new construction volume.
Zillow, that has some of the best price and sales data on real estate of any company says home prices will fall in 123 housing markets, while 780 markets will go higher in 2023 after analyzing 911 markets. Over the next 12 months, Zillow predicts that U.S. house prices will climb just 2.4% overall nationally. That’s down from the 7.8% they forecasted a month ago. [5]
Zillow’s biggest forecasted home price decline forecasts are for:
Fairbanks -4.6%
Charleston, W.Va. -4%
Lake Charles, La. -3.8%
San Jose -3.6%
Odessa, Texas -3.3%
Zillow’s biggest forecasted home price increase forecasts are for:
El Centro, Calif. 8.5%
Homosassa Springs, Fla. 8.4%
Ocala, Fla. 8.2%
Idaho Falls, Idaho 8%
Sebring, Fla. 7.8%
The higher the past increase of the home prices in your area over the past 3 years along with the current demand from people moving for jobs or the weather to your area will determine if your market is affected with lower home prices.
