What’s Going on with the Housing Market?

Market Memo – Planning Article

July 2023 – By Tom Rueger, J.D., CFP®

After a run that saw mortgage rates drop to all-time lows and home prices soar to new highs, the U.S. housing market finally started slowing in late 2022. Real estate professionals worried about a housing recession and home prices seemed poised for a correction as mortgage rates moved higher. For the week ending July 6, mortgage rates hit 6.81%, the highest level for the year so far, Freddie Mac reported (CNN). In theory, when mortgage rates go up, home prices should fall since it raises the cost of homeownership, thereby reducing demand.

Then a strange thing happened. The housing market began to strengthen and home values started rising again. Home prices peaked in June 2022, declined until January 2023, and then began to recover. In fact, housing prices have increased for three months in a row, according to the latest Case-Shiller home price index (Bankrate). The latest Federal Housing Finance Authority House Price Index (HPI) shows national home prices rose at a seasonally adjusted rate of 0.7% between March and April and 3.1% from a year ago, with the index reaching a new record high of 401.2 in April, and the gains are accelerating with each new month (Forbes). It seems like buyers may have simply become used to higher rates. “Seven percent mortgage rates are now the new normal, and people are accepting it,” Robert Reffkin, CEO of Compass Real Estate said (CNBC). “It’s creating a lot of confusion,” according to Orphe Divounguy, a senior economist at Zillow (MSN).

Despite high mortgage rates, the housing market remains very competitive thanks to strong demand coupled with tight inventory supply, due in part to those who purchased homes in recent years at record-low interest rates staying put. According to a Redfin study, 82.4% of all current homeowners are locked in below the 5 percent mark (Bankrate). This creates a strong disincentive that keeps current homeowners from selling, causing a “rate lock-in effect.”

In fact, housing inventory is approximately 46% below the historical average dating back to 1999, and down by a third from before the pandemic (Forbes). As of June, there were 614,000 existing homes listed compared to almost 928,000 in February 2020, according to data from Realtor.com (CNN). These and other factors form an affordability crisis that continues to sideline many aspiring homeowners. In addition, home values historically tend to remain sticky even when demand falls, as buyers do not want to overpay, and sellers prefer to hold on until values rebound thereby limiting home sales.

Where does this leave the housing market? With the estimated pent-up demand for housing ranging from 1.5 million to 3.8 million homes, it will take time for the nation’s builders to find suitable land and skilled labor and materials to create the much-needed supply (U.S. News), all while navigating tighter credit conditions. The National Association of Home Builders expects this pent-up demand to be satisfied sometime between 2025 and 2030 (U.S. News). According to Rick Arvielo, head of the mortgage firm New American Funding, “You’re not going to see house prices decline.” (Bankrate) While Skyla Olsen, chief economist at Zillow echo’s that thought saying, “We’re not in that space where things are suddenly going to be more affordable.” (Bankrate)

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