The U.S. housing market has grown exponentially ever since the dawn of the pandemic, aided by historically low-interest rates.
Sellers have received top dollar for their homes in the last two years due to a lack of housing supply and better-than-expected demand.
30-year mortgage rates that stubbornly hovered around 2.6% in 2021 made real estate an appealing investment opportunity for investors, and many people relocated as the remote work trend took over, increasing housing demand, particularly in the suburbs.
On the other hand, due to pandemic-related disruption, inventory fell to its lowest level since the 1970s, and buyers were willing to spend almost any price tag to outbid other potential buyers for their desired property during the tightest housing inventory market in history.
As a result, housing prices in the United States sharply rose in 2020 and 2021. The market was in the favor of sellers because of solid demand and scarce supply. However, the uptrend in home sales began to show some cracks in mid-2021 as the supply-demand imbalance showed some early signs of shrinking.
Longer delivery times, labor shortages, rising material costs, and supply chain issues also impacted the housing market.
As construction costs increased, builders could not produce more affordable homes, and demand for new homes began to decline gradually, although prices remained sky-high due to supply shocks. Additionally, fewer people applied for home mortgage loans in 2021, and there were fewer prospective buyers compared to late 2020.
The mixed signals sent by housing market dynamics have made it challenging for investors to determine what the future holds for the housing market. Below are the significant factors influencing the housing market in 2022.
Rising Mortgage Rates
Home sales began to decline when 30-year fixed-rate mortgage rates rose this year, reaching 5.81% in late June, nearly double the average from a year ago.
Mortgage rates remained below 4% from mid-2019 until March, when they began to exceed 5% for the first time in 11 years. According to the National Association of Realtors, the average mortgage payment in July was more than 50% higher than just a year ago.
Exhibit 1: Falling Existing Home Sales
The 30-year, fixed-rate mortgage dropped to 5.55% in August but rose above 6% in September for the first time since the 2008 housing crash, pressuring more home buyers to back out of deals from a rapidly cooling housing market.
Rising interest rates are a result, in part, of the Federal Reserve’s aggressive push to contain the worst inflation the U.S. has seen in 40 years.
The Fed has raised its benchmark short-term interest rate five times this year, and it is likely to keep interest rates high for some time to slow down inflation and bring the housing market back into balance.
Although the Fed’s policy changes do not directly affect mortgage rates, they do affect Treasury bonds, which affect mortgages, making borrowing money more expensive for consumers and thus reducing the demand for new houses.
According to Fed Chairman Jerome Powell, the housing market requires realignment between supply and demand, which will necessitate a correction. Mortgage rates are expected to remain in the 5% to 6% range for the rest of the year, weighing on home prices.
Sellers Are Stepping Back
Home prices remain high, and the inventory is still below the levels seen before the start of the pandemic in 2019. According to a report from Realtor, there were 42.6% fewer homes available for sale in September than there were on average between 2017 and 2019.
Demand and inventory are two factors that significantly influence prices. Sellers are backing down as more buyers withdraw due to the affordability crisis. Even though inventory was 26.6% higher than a year ago in August, houses were on the market four days longer than the previous year, which signals a cooling down in transactions.
Furthermore, new listings were 13.4% lower in August and 9.8% lower in September than a year ago, indicating that homeowners are hesitant to list due to falling demand.
According to Fannie Mae’s Home Purchase Sentiment Index (HPSI), the net share of respondents who believe now is an excellent time to sell has decreased by 16% from the previous month and by 30% year over year.
Existing home sales, or sales of previously owned homes, have been declining because homeowners do not want to trade low rates for higher ones.
Exhibit 2: Newly Listed Homes in September
Home Prices are Cooling Down
Even though the rapid reversal of the red-hot housing boom has weighed on housing demand, prices remain elevated. According to the National Association of Realtors (NAR), the median home price has increased monthly this year, reaching a record high of $413,800 in June, but sales were down 5.4% from May.
Prices fell to $389,500 in August, indicating that home prices are gradually softening; however, they remain significantly higher than in 2019.
Seattle’s housing market is slowing faster than any other market in the country, according to a report by real estate company Redfin, which ranks the 100 most populous U.S. metropolitan areas based on metrics such as prices, price drops, supply, pending sales, sale-to-list ratio, and speed of home sales.
According to the report, the top ten fastest-cooling markets are on the West Coast, with Seattle and Las Vegas leading the way, followed by San Jose, CA, San Diego, Sacramento, CA, Denver, Phoenix, Oakland, CA, North Port, FL, and Tacoma, WA.
The most expensive housing markets in the United States and the most popular migration destinations are experiencing double-digit drops in prices and sales volume compared to the previous year.
Exhibit 3: Fastest Cooling Housing Markets in the U.S., August 2022
In Seattle, approximately 34% fewer homes sold within two weeks in August than the previous year, and the average home sold for 5% more per square foot in August than the last year.
Increased interest rates have made buying a house in those already-expensive areas even more challenging, doubling the mortgage payment from the beginning of the year. The high rates have also caused a cooling down in remote worker hotspots.
Relocation caused home prices to skyrocket, with the average Las Vegas home costing $416,000 in August, up nearly 35% from 2020.
The growing affordability crisis has reduced demand, resulting in a gradual price drop and excess supply in the market. As a result, prospective buyers are holding off until interest rates and prices fall, while sellers hope the market improves to get a higher price.
Housing finance giant Fannie Mae economists predict that prices will be 16% higher in the coming quarter than a year ago.
Historically, the fourth quarter of a year has been when housing market activity slows. If history repeats, the market will see a further slowdown in sales in the final three months of 2022.
Every year, home sales trend higher in the summer and slow down in the winter.HousingMarket.com
Although the seasonality varies by location, most cities’ number of homes available for sale noticeably decreases during the winter holidays. Buyers and sellers with children typically move at the end of the school year, which is why a study found that June is one of the busiest months for the housing market, with July 31 being the single busiest day, with a large number of people looking to buy houses or relocate.
People buying more aggressively during summer limits the number of available homes and drives up market prices, which reverses in the winter.
On the other hand, data shows that homes sit on the market longer during the winter. According to Aceable, an online real estate school, from 2017 to 2020/2021, it took 60 days in the winter for homes to go under contract and around 30-35 days in the summer. As fewer people move during the holidays or on cold winter days, it is typical for the market to slow down between November and January.
Because winter is not the most popular or busiest moving season, competition is low, although inventory remains stable, and those looking to buy a house are likely to find a good deal.
However, today’s buyers are having difficulty finding a home because inventory is already at record lows. Due to the limited supply, lower interest rates, and fear of missing out, days on the market dramatically improved in December of 2021, with homes selling in less than 30 days, on average, in the winter.
However, this feat is unlikely to repeat this year, with the housing market facing several headwinds, including a sharp rise in mortgage rates.
Additionally, fewer people move during the holidays, eliminating the period between November and January. At this time of year, people generally do not want to add the logistics of moving to an already hectic holiday season filled with family obligations, end-of-year deadlines, and unpredictable weather conditions.
The Outlook For The U.S. Housing Market In The Coming Quarter And 2023
Although the real estate sector plays a vital role in the recovery of the U.S. economy, the fear of a recession coupled with rising interest rates will significantly impact the market. The Federal Reserve’s aggressive interest-rate hikes triggered a twist to the pandemic housing boom. Buyers have become scarce as prices for everything run high, and they do not want to overpay.
Realtor.com says a homebuyer will now pay nearly 50% more for the same property compared to a year ago.
The Fed has signaled that more rate hikes are on the cards, and borrowing costs are already at their highest since 2008. This means more prospective buyers will wait for a better policy environment. As a result, housing inventory will rise, indicating that price declines will accelerate further.
The housing market is in transition owing to an uncertain economy, high inflation, high mortgage rates, and record-high home prices, and this trend is expected to continue in 2023. According to Mark Zandi, chief economist at Moody’s Analytics, prices will fall 5% to 10% from peak levels without a recession and up to 15% in a mild recession.
With U.S. interest rates hovering around 5-6%, Fannie Mae’s Economic and Strategic Research (ESR) Group slashed its forecast for total home sales this year to 5.02 million units, down from 5.71 million units previously, and expects home sales to be 3.93 million units in 2023, down from 4.98 million units previously. The report also highlights that the total mortgage origination activity will be $1.6 trillion in 2022 and decline to $1.3 trillion in 2023.
Home prices are softening, although they remain significantly higher, and mortgage rates show no signs of easing, making now a tough time to purchase a house.
Prices are falling from peak levels, bidding wars are fading, and sellers are expected to cut their price expectations. This appears to be an opportunity for potential buyers looking to gain an advantage after a year-long market hype.
Still, prudent buyers are facing the worst affordability in nearly four decades. The market is cooling quickly in areas where affordability has gotten out of hand. As buying slows, more inventories may become available and remain in need for longer, leading to more price declines.
The recovery will likely take a few quarters in the best-case scenario and a few years in the worst-case scenario. This leaves ample time for real estate investors to make the most of the bargain prices that will soon be available for prime properties.