Homebuyers on a tight budget face two years of misery.
The 2020 Covid pandemic and plummeting mortgage rates have sent prices skyrocketing. Builders, who usually jumped in to add supplies, were instead suffering from labor shortages and soaring commodity prices.
But the good news lies ahead. These dynamics are finally changing and buyers may be taking a break before long.
House prices appear to have peaked. The S&P/Case-Shiller National Home Price Index fell 0.2% from June to July, its first monthly decline in a decade. A month-long drop in a metric usually doesn’t reveal a trend. But economists believe this is the beginning of a gradual correction and house prices will continue to flatten or decline in the coming months.
This makes sense given that interest rates are rising rapidly. Mortgage rates have soared from 3% a year ago to about 6.7% now, and the monthly payments for a typical home have skyrocketed. Housing demand is softening as higher interest rates make it more expensive to buy a home.
The culprit is the Fed, which has been raising interest rates to keep inflation down. By increasing the cost of borrowing, the Fed will curb demand. And if fewer people want to buy, the price should slow down or fall.
The Federal Reserve won’t go into detail on this, but housing is one area where it hopes demand will decline. At this time, it’s a bad time to buy as prices are still relatively high and mortgages are more expensive. The National Association of Realtors calls thisIncreasing Affordability Crisis‘ said the typical buyer has lost $107,000 worth of purchasing power this year. All of this helps explain why resale home sales have fallen for his seventh straight month.
But, at some point, sellers have to price homes at a level that buyers can afford, so affordability issues ultimately lead to lower prices. The following chart of the S&P/Case-Shiller National Home Price Index helps illustrate future developments. The first thing to notice is a small flattening on the far right of the graphed line. This is a slight drop in his July price and the first sign of a flattening out.
The historical trend from 1987 to 2002 was a slow but steady rise in house prices, averaging 4.2% annual growth. Then came the housing boom and the first steepening on the charts. From 2003 to 2006, home prices increased by an average of 10.7% annually. This is 2.5 times the average over the last 15 years. We now know it was an unsustainable bubble driven by fraud, terrible lending standards, bad regulation, oversupply and greed. However, sales continued to skyrocket and prices skyrocketed as the upcoming wipeout was not apparent at that point.
The crash that followed was ugly and devastating. Average home prices fell 26% from the 2007 peak to the 2011 low. On an annual basis, this five-year average price decline for him was 5.3%. In the most frothy markets, values fell even further.
A solid recovery continues, leading to the chart’s most intriguing section: The sharp rise in prices that began in mid-2020 was just as Covid pushed people out of cities and into a frenzy for buying suburban and vacation properties. From June 2020 to June 2022, home prices rose an unprecedented 40%. During the housing bubble of 2003-2006, the two biggest years of house price appreciation were only 31%. After the bubble burst, many economists argued that house prices would never rise so quickly again.
But we just have
For buyers, it raises the intriguing prospect that we may be on the brink of falling prices again, once again being a buyer’s market. growth is slowing and house price corrections are likely to deepen.” “However, we believe a sharp year-on-year decline in prices at the country level is unlikely. We expect annual home price growth to slow to around 2% in 2023.”
The types of bargains that popped up during the last housing crash are unlikely this time around. There are no millions of foreclosures in the pipeline because the lending standards are solid. It’s not too many homes, it’s too few. When sales are soft and prices are starting to fall, corporate entities may buy homes and convert them to rentals, preempting individual buyers.
Still, the market is likely to improve for buyers, and looking at long-term trends shows that prices tend to return to their historical averages after unusual rises or falls.
This suggests that the sharp price curve of the past two years is likely to flatten out significantly by 2024 or 2025, suggesting that prices may fall and remain depressed for some time. This is also happening during a period of high inflation that is pushing wages higher than usual, and if house prices stay flat and wages continue to rise, purchasing power will improve.
The wait for eager buyers to enter the market is not over, but it may be in sight.