It’s October 2022, and the housing reports for the 3rd quarter of 2022 are out. It is no surprise that the housing market has been cooling down over the past few months. What is a bit of a shock is just how drastic the change has been in some areas of the country.
Real Estate is definitely a local market phenomenon, and we expect that not all markets will behave the same. We will cover some regional statistics that will give you some context about the Real Estate market conditions so you have better insights into why we have seen such a stark turnaround in the market and what is coming up in the next quarter and 12 months.
Mortgage rates continue to rise, and affordability shrinks
Mortgage interest rates have doubled in less than 12 months. At the beginning of October 2022, 30-year fixed-rate mortgages are at around 7.25%, a 21-year high. The last time the 30-year fixed mortgage rate was in the low 7s was Jan 2001, when rates were on the way down, and the 30-year fixed rate hit 7%, according to FreddieMac (FHLMC).
Since we are in a “rapid shift” mindset, consider that in January of 2022, just over nine months ago, the 30-year fixed rate mortgage was averaging 3.22%, according to FreddieMac. Fast forward nine months later, and we are averaging 7.25% for a 30-year fixed-rate mortgage. How does that impact affordability? Let’s take a quick look:
How much house can a buyer afford at different rates with a $2,500 monthly mortgage payment budget?
| Mortgage Rate | Purchase Price (With 20% down) |
| 3.00% | $744,000 |
| 3.50% | $700,000 |
| 4.00% | $656,000 |
| 4.50% | $620,000 |
| 5.00% | $580,000 |
| 5.50% | $550,000 |
| 6.00% | $525,000 |
| 6.50% | $495,000 |
| 7.00% | $470,000 |
Basically, what has happened is, those looking at what they can afford to buy today with the current rate market realize that just 10 months ago, they could afford 59% more house than what they can afford to buy today.
This is particularly difficult for buyers in high-priced metro areas where budgets were already stretched to the max due to the recent steep rise in home prices in those areas. In fact, let’s take a look at some of those high-priced areas so we can get some perspective on the sticker shock buyers are experiencing right now.
Naples, Florida’s median home price went from $457,605 in Sept 2021 to $646,424 in Sept 2022. Breaking out the old calculator and inputting these numbers, I come up with a 41.3% annual jump in home prices for Naples. And by the way, while the price of homes in that area was going up by 41%, mortgage rates were doubling. What does this look like in dollars and cents? Let’s take a look:
Naples, Fl
| Year | Home Price | 80% Mortgage | Interest Rate | P&I Payment |
| 2021 | $457,605 | $366,000 | 3.25% | $1,593 |
| 2022 | $646,424 | $517,100 | 7.25 | $3,528 |
Being a numbers guy, I plug in those monthly payments into my trusty spreadsheet and the end results is a shocking 121% increase! A home buyer looking at the exact same house a year ago vs. today ends up paying more than double the monthly payment for the same house. Let that sink in for a little bit.
Now let’s look at a less drastic example where we had moderate appreciation in a high-priced area, and buyers are mostly feeling the impact of rising mortgage rates:
Los Angeles, CA
| Year | Home Price | 80% Mortgage | Interest Rate | P&I Payment |
| 2021 | $836,886 | $669,500 | 3.25% | $2,914 |
| 2022 | $908,160 | $726,528 | 7.25% | $4,956 |
Computing that monthly principal and interest payment for both years and calculating the difference I come up with: The monthly payment for the same house was 41% cheaper in 2021 than in 2022 even if the home prices were up a more moderate 8.5%.
As we can see, rising mortgage rates are the biggest threat to the housing market right now. And there is more to come. The Feds have two more FOMC meetings scheduled this year; November 2nd and December 14th. Speculation is that there will be a total of 75 to 100 basis points of additional interest rate hikes before the year ends. Although there is no direct relationship between Federal Funds rates and Mortgage Rates, they follow a similar trajectory.
Bottom line: mortgage rates are expected to go even higher, driving affordability down even further.
Real Estate prices reacting to rates and affordability impact
Looking across all markets in the nation, the sales numbers tell one story: May of 2022 is when things took a drastic turn for the market.
In the four months preceding October 2022, there are 10 US Metro areas with annualized price declines in the double digits, here are the top 10 metros with the highest price drops in four months:
10 metros with the highest price drops in four months
| Rank | Metro, State | 4 month price drop | Annualized price drop |
| 1 | Austin, TX | -8.2% | -24.7% |
| 2 | San Francisco, CA | -7.9% | -23.6% |
| 3 | Salt Lake City, UT | -6.8% | -20.3% |
| 4 | Phoenix, AZ | -6.6% | -19.8% |
| 5 | Los Angeles, CA | -6.5% | -19.6% |
| 6 | Boise, ID | -6.3% | -19.0% |
| 7 | San Diego, CA | -6.1% | -18.4% |
| 8 | Reno, NV | -6.1% | -18.4% |
| 9 | Sacramento, CA | -5.6% | -16.8% |
| 10 | San Jose, CA | -5.3% | -15.8% |
It’s worth noticing that 50% of the five fastest declining markets are in California, where prices have also gone up at record speed in recent years.
Sitting inventory of available homes increases as demand drops
Another indicator of market conditions is the supply of homes for sale or “current inventory”. There are 15 US metro areas where inventory has more than doubled between Sept 2021 and Sept 2022. Here are the 10 metros where inventory has increased the most:
10 metros where inventory has increased the most
| Rank | Metro, State | Sept 21 Inventory | Sept 22 Inventory | Percentage Change |
| 1 | Ogden, UT | 672 | 1,888 | +181% |
| 2 | Phoenix, AZ | 6,278 | 16,778 | +167% |
| 3 | Raleigh, NC | 1,421 | 3,788 | +166% |
| 4 | Huntsville, AL | 545 | 1,441 | +164% |
| 5 | Provo, UT | 930 | 2,366 | +154% |
| 6 | Killeen, TX | 510 | 1,296 | +154% |
| 7 | Lakeland, FL | 1,110 | 2,749 | +159% |
| 8 | Nashville, TN | 2,828 | 6,371 | +125% |
| 9 | Colorado Springs, CO | 1,086 | 2,431 | +124% |
| 10 | Austin, TX | 3,804 | 8,506 | +124% |
These metros essentially have more than twice the number of homes available for sale as they had a year ago. If there is a bit of good news for buyers, this could be it. More homes to choose from at least means buyers can negotiate better deals.
Bottom line
Looking at the numbers across some of the fundamentals that paint a picture of what is happening right now in the Real Estate market, it is safe to say the market has seen better days. At least for now and for the short term ahead, those markets that are already declining will continue to decline.
But there is more! We have actually just looked at prices and inventory numbers so far. Other factors that also help paint the entire picture of the market are: housing starts, value-to-earnings ratio, and job growth. We will be covering that next week, so stay tuned.