The Coming Housing Market Downturn

After two years of rapidly rising housing costs, we’re now seeing signs of a housing market downturn in residential real estate.

While it’s not necessarily true that what goes up must come down — sometimes prices rise and stay that way — when they rise as fast as they did, there’s bound to be some sort of deflation or at least a leveling off.

Today’s guest post from medical student Rui Bouça explores the data and indicators that point to a significant slowdown in the U.S. housing market.

Rui Bouça is a freelance writer, content marketeer and SEO consultant. He has a BSc and Masters in Economics, worked in the largest Portuguese bank, now attends medical school part-time, and currently writes academic and blog articles.  He just launched his newest website The Timeless Designer.

 

housing-market-downturn

 

Despite the housing market’s skyrocketing during 2020 and 2021, the housing market is now cooling, and we may even be facing a recession. Housing prices have skyrocketed, and mortgage rates have reached their highest value since 2008.

Several facts support the thesis of the cooling housing market. On the supply side, we have a lower supply due to higher costs, which also pushes the prices of homes higher. On the demand side, we have higher interest rates which drive the cost of borrowing money and increase inflation. All of this makes it difficult to buy a house.

But still, even if we agree that the housing market may be on the verge of recession, why should you care? Well, spending on housing accounts for roughly 18% of the United States GDP. A housing market crash has enormous effects on the real economy and, consequently, on your pockets. This was made very clear in 2008.

So without further ado, let’s dive into the indicators that can reveal the housing market’s slowdown.

 

1. Higher interest rates

 

Fed-Interest-Rates
Source: Statista

 

This past June and July, policymakers approved a 75-basis point rate increase and are planning to further that rise in their meeting later in September. This was the most aggressive rate hike since 1994!

Although the official interest rate doesn’t directly affect the mortgage rates, it indirectly affects it via two channels. On one hand, this monetary policy makes the cost of borrowing money to buy a home higher. On the other hand, it is one of the most significant factors influencing the 10-year Treasury yield. This, in turn, is what fixed mortgage rates tend to track.

Hence, higher interest rates tend to yield higher mortgage rates.

 

2. Higher Mortgage Rates

 

In the pandemic, the small supply combined with low mortgage rates resulted in a bidding war between potential buyers who were making offers above the listing price. This continued to happen throughout 2021 and the first half of this year, which meant a giant increase in the housing prices.

 

Monthly median sales price for total existing homes

Median-sales-price-existing-homes
Source: National Association of Realtors

 

This also meant an increase in the 30-year fixed mortgage rate, reaching 5.89 percent as of September. Rates in 2022 are at the highest level we’ve seen since 2008. The increase in the mortgage rate makes it tougher to rent and housing less affordable.

 

Mortgage-Rates-2022
Source: Freddie Mac

 

 

3. Housing is Less Affordable and Renting Is Becoming More Expensive

 

The increase in mortgage rates yields a decrease in housing affordability. The National Association of Realtors’ Housing Affordability Index measures the degree to which an average family can qualify for a mortgage loan on a typical home. As the mortgage payments climbed 53.7 percent and the median family income only rose 5.8 percent in June 2022 compared to one year ago, June’s affordability index figure of 98.5 is the lowest since June 1989.

 

Unfortunately, rent prices have also risen during the pandemic. The average monthly rent was $2,031 in July, an increase of 13.7 percent compared to a year ago, according to data from Zillow. All this diminishes the real disposable income of every economic agent, which in turn increases the need for a side hustle.

 

4. New Listings Have Started to Drop and Home Construction is Slowing Down

 

According to Redfin data, new listings dropped to 670,766 in July, down 132,649 new listings when compared to the previous month. New listings decreased an impressive 19% when compared to July 2021. According to Goldman Sachs Chief Economist Jan Hatzius, “home sales are likely to fall further on net”.

For the first time in over 17 months, in August, the average home sold for less than its list price, according to the same report. In the same month, one in five sellers dropped their asking price. One year ago, that was roughly one out of ten sellers.

On the other hand, the construction of new homes has slowed down due to higher borrowing costs, the rise in material prices, and also the fear of the consequences of higher mortgage rates. According to data from Census Bureau, the monthly new residential construction fell to 1.45 million in July, which was a 9.6 decline from the previous month.

 

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5. National Association of Home Builders/Wells Fargo Housing Market Index Is Plummeting

 

The NAHB/Wells Fargo Housing Market Index (HMI) is a monthly sentiment survey of members of the National Association of Home Builders (NAHB). It measures sentiment among builders of U.S. single-family homes. The index peaked at a 35-year high of 90 in November 2020, was 80 a year ago, and was roughly 50 in July.

 

NAHB Housing Market Index

NAHB-housing-market-index
Source: Trading Economics / NAHB

 

What Should You Do As An Investor?

 

Amid this revolving housing market, the crypto market has also lost 70% of its value, and investors’ panic may affect the market even further. This begs for rationality when choosing investment platforms.

Since the US economy is still not officially in a recession and the job market is performing well, it’s too soon to make abrupt changes in your investment portfolio. However, avoid taking unnecessary risks at the moment.

 

Conclusion

 

The pandemic brought down low interest rates, propelling house prices through the stratosphere and mortgage rates to a low value. However, this year came along, and the increase in the price of  materials, the war in Ukraine, the escalating interest rates, high inflation, and the overall cooling economy are pushing the housing market towards a recession.

The signs are here:

  • We are facing tremendously high mortgage rates.
  • Houses are being sold under the listing price with increasing difficulty.
  • The monthly sentiment is plummeting.

 

All of this is happening in a scenario where the gross domestic product (GDP) has declined for two consecutive quarters, which can qualify as a recession.

With the 2008 shadow appearing upon us, we should ask ourselves, how did we get here again? That’s what this article intended to explain, and my take is that it’s too soon to panic, but it’s too late to see this as a mere economic fluctuation.

 

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What signs of a housing market downturn have you seen?

 

8 thoughts on “The Coming Housing Market Downturn”

  1. The problem is the federal reserve for the last 20 plus years has created a bubble economy by creating artificially low rates again which fuels housing prices, company borrowing and consumer spending. When the bubble bursts you get 2008 and the upcoming even worse 2023. As an investor you must get your money out before the bubble pops and put it in at the next bubble inflation. Buying a house now is taking unnecessary risk especially a second home.

    Reply
  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. We are already in a recession and have been for 6 months now. We haven’t even started on the RE recession. Doubling the IR means very serious RE downturn. A vicious circle starts when the largest asset of the middle class (their house) loses value. They cut spending which in turns depresses the economy. This one will be severe.

    Reply
  4. It’ll be interesting to see what happens. My read is that the situation is not like 2008, but certainly there was some over-exuberance the last few years that has driven house prices above where they should be. I think we’ll see a downward trend, but hopefully not a death spiral with short sales galore.

    Even so, if it does happen, we weathered the last storm by simply locking in our lower mortgage rate and staying put. The plan is no different this time!

    Reply
    • I agree. I can’t imagine we’ll see values decline 40% to 60% like they did in some markets in the Great Recession, but rather a leveling out or milder decline (10% to 20%) depending on the location and property type.

      Cheers!
      -PoF

      Reply
  5. Builders stopped building for a while after the 2008 crisis, and again during covid. The result is that we are somewhere between 3-5 million houses short of where we would expect to be (depending on which study you rely on – but they’re all in the millions of houses short). This shortage in housing implies continued strong demand.

    Reply
  6. The cost of housing keeps going up. Rent is going up, and mortgage payments are going up. But market prices will moderate as houses are not affordable at current mortgage rates.

    Reply

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