As real estate investors, you've undoubtedly been following the rollercoaster ride of the U.S. housing market closely. From record-breaking mortgage rate lows to soaring home prices, 2022 was a year of extremes. At one point, it seemed like we were heading for a housing recession with mass layoffs in mortgage companies and ominous predictions from real estate economists. However, something unexpected occurred on the way to the supposed crash. Home values began to rise again, and the market took an unexpected turn.
Resilience in Home Values
According to the latest Case-Shiller home price index, housing prices have seen an increase for four consecutive months. Additionally, the National Association of Realtors (NAR) reported that over half of U.S. metro areas experienced gains in home prices during the second quarter of 2023. It's essential to note that while NAR recorded a decline in median sale prices of existing homes for five consecutive months through June, this decline comes with an asterisk. In June 2023, the median home price was $410,200, making it the second-highest monthly figure ever recorded by NAR, surpassed only by June 2022's $413,800.
The Supply and Demand Conundrum
One significant factor contributing to the market's resilience is the persistent lack of housing supply. Bidding wars have returned, and inventory levels remain frustratingly low. Rick Arvielo, the head of mortgage firm New American Funding, emphasizes, "You're not going to see house prices decline; there's just not enough inventory."
Skylar Olsen, chief economist at Zillow, echoes this sentiment, highlighting the ongoing supply-and-demand imbalance. Her forecast predicts that home prices will continue to rise into 2024, which may be welcome news for sellers but presents challenges for first-time buyers striving to enter the housing market. Olsen explains, "We're not in that space where things are suddenly going to be more affordable."
Rising Mortgage Rates and Market Uncertainty
Despite mortgage rates exceeding 7 percent, home values have remained steady. The culprit, once again, is the limited housing supply. However, a sudden rise in mortgage rates and a notable slowdown in home sales have some experts concerned. Federal Reserve Chairman Jerome Powell expressed this concern after a June 14 meeting, acknowledging the sensitivity of the housing market to interest rates and stating, "We're watching that situation carefully."
Is a Crash Imminent?
Given the current state of the market, many are drawing parallels to the housing bubble of 2005-2007, which resulted in a catastrophic crash and a global economic downturn. The question on everyone's minds, especially for buyers and homeowners, is whether the housing market is on the brink of another crash.
Housing economists generally agree that while prices could experience a decline, it won't be as severe as the Great Recession. There are several key differences this time around. Firstly, homeowners today have stronger financial positions, boasting excellent credit, substantial home equity, and fixed-rate mortgages at rates well below 5 percent. According to a June Redfin study, a staggering 82.4 percent of current homeowners have locked in rates below 5 percent.
Moreover, builders have learned from the lessons of the past and have been cautious in their construction pace, resulting in an ongoing shortage of homes for sale. Lawrence Yun, Chief Economist at NAR, emphasizes, "With the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely."
While the U.S. housing market has experienced significant fluctuations, it appears to be on a path different from the crash of 2008. Real estate investors should stay informed, monitor market conditions, and consider the factors contributing to its current resilience. While there may be challenges ahead, the housing market seems better equipped to weather them than in previous times of uncertainty.