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Thank you for reading this post, don't forget to subscribe!As macroeconomic events since last summer have taken center stage, the market has become increasingly volatile. federal ReserveThe ongoing war against inflation remains a source of uncertainty for interest rates and the broader financial markets. It has also increased the chances of a minor recession later this year.
Although rates have dropped from over 7% earlier this year to below 6.5% recently, the cost of borrowing is still significantly higher than in 2021 or early 2022. This, along with several notable bank failures, dwindling personal savings accounts, and mounting debt. Utilization has impacted homebuyer demand, which is running below both the 15-year high of 2021 and pre-pandemic numbers from 2018 and 2019.
This weakness in homebuyer demand and the ongoing purchasing power side effects of higher interest rates have also begun to reflect in home prices, which are down on a year-on-year basis for the first time in more than a decade.
However, many homes sold during the last three years were concentrated in high-priced areas, exaggerating home price increases due to price increases and now exaggerating the decline. as sales of multi-million dollar homes begin to normalize.
However, the recent softening of home prices has raised questions about whether it’s “2008 all over again!” But, despite undeniable changes in the market after running so hot during the pandemic, many of the ingredients required for a flood of foreclosures or sharp price declines look very different than they did a decade ago.
Mortgage underwriting standards have been much stricter in the past decade than in the era before the 2008 financial crisis. The average FICO score for a new mortgage has been consistently over 700 for the past 10 years.
Inventory was so tight that homes often went to buyers with large down payments or all-cash offers. The vast majority of new mortgages were fixed rate loans originated or refinanced at the lowest rates ever. And, at least partly because of this lock-in effect from the prevalence of low-rate mortgages, inventory is still very tight and getting tighter each week.
This represents an important differentiating factor from previous housing cycles. When prices were falling by as much as 50% or 60%, California was at about 18 months’ worth of housing supply as REOs and short-sales flooded the market. In March 2023, it was just 2.2 months of supply, the lowest level in nearly 20 years outside of the pandemic housing crisis.
So what does this mean for housing in 2023 as we head into home buying season and the second half of the year? We should expect transaction numbers to remain low: Demand has eased in the face of higher rates and we do not have enough inventory to support a rapid rebound in home sales.
However, the labor market has not yet faltered and, despite high interest rates, the level of rates is not particularly high by historical standards. It is likely that the major concern going forward will not be, “Where are the homebuyers?” Rather, “Where are the houses to put them?” Through that lens, the outlook for prices looks very different than it did during the previous cycle.
While prices are expected to remain relatively soft, we have already seen the heat of the market reaching 7% each time and then falling again. It’s reasonable to assume that the extremely low inventory that will prevent home sales from bouncing back quickly will also be the primary factor preventing more significant price declines this time around.
This column does not necessarily reflect the views of HousingWire’s editorial department and its owners.
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on Brain Nath [email protected]
