From 2020 to 2022, the housing market experienced a pandemic housing boom that resulted in prices soaring 34.4%. That’s over 12% higher than the days leading up to the infamous 2008 financial crisis. But the reasons for the increase are far different this time around. Record-low inventory, record-low mortgage rates, a surge of millennials ready to buy, a pandemic giving many workers a work-from-home option, coinciding with cash-rich investors reaping the benefit of an all-time high stock market were all part of the perfect storm that contributed to increased demand and home prices. Many sources are reporting that housing is now showing signs of cooling off—but maybe the market is simply cycling back to a more balanced state. Here are current facts and historical points to put it all into perspective.
Reasons for Price Slow-Down
There are three main reasons that housing prices are starting to see a slow down in price:
1) The Fed is fighting inflation. A historical move to damper inflation is to raise interest rates, which naturally has the effect of slowing down affordability to a large segment of potential home buyers. In the past five months, mortgage rates have gone from 3.11% to 5.25%.
2) Home price grew over 19% during the past year while wages grew only 4.8%. There simply isn’t room to sustain such large increases in terms of home owner affordability.
3) While no one can see into the future, some experts are predicting a recession. If that happens, we may see an uptick in unemployment, which could trickle into a housing slow down.
Despite the Economics, There Still Aren’t Enough Homes
A deceleration in price does not mean a loss of value compared to pre-pandemic times. It may simply mean a slower climb in price over time. Also, even if the rush of potential buyers thins out, the market is still incredibly low in inventory. The stay-at-home and work-from-home way of life created a rush of buyers who wanted more from their living space. This in turn created a competitive swell of bids that drove up prices. Times are changing back to a sense of normal. While competition still exists, the fact that it may soon slow down is actually good news for those who are desperate to move. Seeing any type of increase in inventory and leveling off in home price is a good thing for so many families who need a better space to live.
Keep This in Mind When People Say “Recession”
While a recession seriously affects families’ jobs, income, and living expenses, it usually isn’t a red flag for home value. Historically, a recession most often did not create home depreciation. Here’s a look at the past four decades. Only two out of six recessions resulted in home value decline in the U.S., with 2008 being one rooted in very different circumstances than what is happening today. In most cases, home value actually increased.
Recessions Since 1980:
1980 +6.1% (home price change)
People buy and sell homes in all types of housing markets and economic times. A rebalancing of the market, if it is indeed forthcoming, is good news for buyers. While would-be sellers may have missed out on peak prices of past months, homes overall are still in high demand, selling higher than pre-pandemic times, and moving quickly because of ongoing low inventory.
Sources: Fortune and Keeping Current Matters
Real Estate Term of the Week
The Fed: The Federal Reserve System (FRS), often called the Fed, is the central bank of the United States and arguably the most powerful financial institution in the world. It was founded to provide the country with a safe, flexible, and stable monetary and financial system. The Fed is composed of 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S.