US Housing Market Poised for the Most Significant Reset in over a Decade

Current reports on housing from multiple sources indicate that the housing market’s future is unlikely to be the same as its recent past. Over the last decade, the US housing market has seen a run-up in home prices unlike any other time in history.

Many experts predict that the coming correction will not be as severe as that of “The Great Recession” of 2008 though. Still, the facts remain that 2022 is likely to be a pivotal year in which sellers and buyers will see a significant shift in the market dynamics.

The Affordability Crisis

One of the most significant factors that impact the housing market is an affordability crisis that peaked as we head into the third quarter of 2022. The affordability crisis is fueled by factors such as steep increases in mortgage rates, record-high inflation, and record-high home prices.

Record Rate Increases

Since early 2022 mortgage rates have risen at record speed. This has caused many buyers to be priced entirely out of the housing market.

In march 2022 the average 30-year fixed rate was 3.22%. As of June 2022, the average rate on the same mortgage is hovering at about 5.24% according to the Federal Reserve Economic Data department. That is a 62.73 % increase in the cost of housing in less than 60 days.

According to a leading publication of mortgage data, 2022 is the worst year for rates since 1979.

Even for those buyers who still are able to afford the new rates, the significant jump in monthly mortgage payments is giving them pause.

Highest Inflation Rates since 1981

Another major contributor to the economic squeeze Americans are feeling is the astonishing rate of inflation. The May 2022 Consumer Price Index as reported by the US Bureau of Labor Statistics indicates an 8.6 jump from May 2021. That is the highest increase in over 40 years.

When your monthly expenses are jumping at such a fast pace, it is easy to see that this trend can only have a negative impact on future home purchases.

Highest Home Prices in History

The Median Price of homes sold in the US reached a record $428,700 at the end of the first quarter of 2022. Even after adjusting for inflation, that is the most Americans have ever paid for a home.

The events of the last 2 years, since the pandemic started, are particularly interesting. If we look at the median price of homes in the first quarter of 2012 which was $238,400 and compare that to the first quarter of  2020 which was $329,000 – we see an increase of 38% over 8 years or roughly 4.75% yearly increases when averaged out.

If we now compare the median price in the first quarter of 2020 at  $329,000 to the first quarter of 2022 at $428,700 – that is a whopping 31% jump in the median price of homes in just two years. The steep increase in prices can be directly attributed to the sharp drop in interest rates that took place around the same period. Buyers saw an opportunity to buy while lowering their monthly mortgage payment with the new rates.

We can also add the severe shortage of homes for sale as another significant factor in the high rate of increase in home values. Sellers are comfortable with their current home and their current mortgage rate, so they are not moving. Home builders took a huge hit during the last housing crash and they have not been in any rush to build homes over the last ten years. What has not slowed down though is, the number of new households. Hence the imbalance of supply and demand.

First-Time Home Buyers Priced out of the Market

Taking into consideration the most recent increases in mortgage rates, inflation, and a sharp rise in home prices, most first-time home buyers have reached their limit. Not only is it economically no longer feasible, but they are also emotionally battered as well.

The frustration of having to write dozens of offers and still not end up with a home in some cases has taken its toll. Many of them are just done with the home buying experience.

As it works in the Real Estate domino effect, if the first-time home buyer can’t get into the first rung of the ladder, the house of cards eventually falls apart. History has proven that it is merely a matter of time.

What to Expect in the near Future

As we look at the near future of the housing market, there are a couple of things that are certain. The FEDs will continue to raise interest rates, that much they promised at a recent meeting in Washington.

The impact of higher rates will eventually curb inflation, although it may take a few months. In the meantime, the cost of housing and other living expenses continues to rise. Buyers will continue to re-evaluate their position and pull back on their plans to buy. We can see that already happening in many markets.

In as much as the market seems to be headed for an inevitable adjustment, the factors leading to that are quite different than the last crash. Even now as we see the increase in rates and the high inflation, the market still seems resilient.

While sales have dropped across the nation, the change has not been that significant thus far. Sales were down only 5.9% from April 2021 to April 2022. This may also be due in part to the fact that homes for sale were also off by 10% during the same period.

This is only the beginning though. If we take a look at all the factors causing downward pressure on the housing market, it is a foregone conclusion that we will have an adjustment. How much of an adjustment to prices though, remains to be seen.

Many, especially first-time home buyers, would very much welcome a more balanced market. A market in which they can at least have a shot at buying a house.

Another group that would welcome a change is the Real Estate agent community. This has not been an easy market for Real Estate agents, especially in the last two years.

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