Several trends have had significant influences on the housing market in the past few years. First, the COVID-19 pandemic triggered a housing market frenzy that was fueled by the forced work from home phenomena combined with historically low-interest rates. Further, supply of housing was lower than long term averages as a result of the continued hangover of the financial crisis in 2008.
As these forces combined, the result was a significant demand for housing, greater ability to afford housing due to low rates, and supply that could not satisfy this demand. As a result, housing prices spiked. Housing became one of the primary sources of inflation, but certainly not the only source. The low interest rates were a result of the Federal Reserve (the Fed) working to jump start the economy post pandemic. The Fed, however, took notice of the overheating economy and rising inflation and began to reverse course and raise interest rates aggressively. As a result of significantly higher rates combined with much higher prices, the lack of affordability brought the housing market to a screeching halt at the end of 2022 and beginning of 2023.
Let’s look through the numbers:
- At the end of June 2020, the median sales price of houses sold in the U.S. was $322,600
- Two years later, the median sales price peaked at $468,000 – a 45% increase.
- During this same period, mortgage rates went from 3.07% to 7.08%
- The recent peak of average mortgage rates hit 7.08% in November 2022; a level not seen in 20 years
This significant increase in home prices and interest rates has created challenges in affordability. The table below reflects the year-over-year change in mortgage payments based on the median home sale and the average 30yr mortgage rate for the given quarter. The data shows recent trends were among the highest levels of increase going back to the 1970’s.
As a result of the lack of affordability, the housing market has slowed significantly. The chart below shows existing home sales, which are down roughly 40% from the peak in January 2022.
Despite the fall in demand for homes, prices have remained level, only falling 0.1% from Q3 2022 to Q4 2022. The primary reason for relatively stable pricing is the continued limited inventory for those still looking to buy.
Lastly, we are often asked if the current housing situation will create “another 2008” or what happens if housing prices fall significantly. While there is little certainty on where housing prices will go in the future, homeowners are certainly better prepared now than 2008. Through the home buying frenzy, roughly 32% of purchasers bought their home with cash2 and those that took on mortgages, the percentage of their disposable income spent on their mortgage has declined dramatically. Lastly, current homeowner’s equity has increased significantly with the recent price gains, creating a large gap between equity in the home and the balance of their mortgage, shown by the graph below from Yardeni Research3.
Typically, in a housing market crash you would see a 20 to 30% correction in prices and foreclosure activity begin to pick up, which is not the case. Currently housing prices remain flat and foreclosures are at very low levels. Therefore, the current housing decline is likely one of lesser activity, due to lower affordability and potential buyers staying on the sidelines, rather than a signal foreclosures and defaults will rise. As a result, we don’t see a slowdown in housing as a precursor to significant financial problems for the US consumer or markets.