Two months ago, Moody’s Analytics chief economist Mark Zandi came Fortune with a bold call: the U.S. housing market, he said, was entering a “housing correction.” At the time, some in the real estate industry brushed it off. How quickly things change. Today, many of the biggest names in real estate have embraced Zandi’s “housing fix” rhetoric.
What happened? The economic shock caused by soaring mortgage rates has pushed affordability beyond what many homebuyers can afford. The move from historically low mortgage rates to the highest rates since 2008 means that homebuyers are finally feeling the full brunt of the record home price appreciation that occurred during the pandemic housing boom. This shut out thousands of potential buyers.
“The market is already correcting. Rising house prices and mortgage rates have increased to the point that demand has seized up in many parts of the country. Home prices are already adjusting lower, and we could see that continue until consumer confidence and affordability reset,” said Ali Wolf, chief economist at Zonda. Fortune.
Across the country, sales of existing homes and new homes are falling rapidly. Fearing oversupply, many builders are cutting spending. Or at least stop building unsold homes.
“It is widely accepted that there is a structural housing shortage in America. The problem is that housing demand fluctuates cyclically based on factors such as consumer confidence and affordability. As demand declines, as we see today, builders will respond by slowing housing starts,” Wolf said. “Too much inventory is also a problem for the broader housing market, because if builders need to cut prices, sellers in the resale market may also need to cut prices to stay competitive.”
How will this housing correction affect house prices? We don’t know exactly yet. But we know what to watch: rising inventories are arguably the best indicator of what’s to come in housing. Since March, inventory levels have skyrocketed across the country. However, this inventory spike varies significantly by market. We’ll take a look.
Of the 917 regional real estate markets tracked by realtor.com, 873 saw increased inventory levels, or the number of unsold listings, between March and June. Of these, 137 markets saw an increase of at least 100%. In 50 markets, including Provo, Utah (up 268%) and Austin (up 260%), inventories rose more than 150%.
Clearly, regional housing markets in the Mountain West and Southwest regions are experiencing the fastest downturns. Ironically, these markets were among the hottest spots amid the pandemic housing boom. As white-collar workers realized COVID-19 had given them the option to work remotely permanently, many fled cities like San Francisco and Seattle and flew to more affordable markets in places like Phoenix and Boise. . This frenzy has seen home prices in these Mountain West and Southwest real estate markets become overvalued relative to underlying economic fundamentals.
“Many markets in the West are landlocked for one reason or another…As a result, construction is more limited in these markets compared to parts of the country with less regulation and more developable land. Strong demand over the past two years has driven up home prices across the country, and it appears the West has hit the price cap faster than other markets given the particular supply constraints,” said Wolf. Fortune.
Although inventory levels are rising rapidly, they remain well below pre-pandemic levels. Indeed, of the 917 markets tracked by realtor.com, 899 have inventory below June 2019 levels. Of these, 601 markets are still at least 50% below their pre-pandemic levels. Logan Mohtashami, Senior Analyst at HousingWire, says Fortune that national inventory levels are expected to exceed 2 million before we even start discussing the possibility of lower house prices year-over-year. In June, the national inventory stood at 1.26 million.
Looking ahead, Zandi sees no real estate crash. Instead, he predicts U.S. home prices will remain unchanged for the next 12 months, while he says significantly “overvalued” real estate markets, like Boise and Charlotte, are set to see prices drop 5% to 10%. But that’s if a recession doesn’t happen. If a recession materializes, Zandi predicts U.S. home prices will fall 5% nationally and 15% to 20% in grossly overvalued real estate markets.
One of the reasons Zandi doesn’t expect a real estate crisis: if the going gets tough, the Federal Reserve may abandon monetary tightening. If that happens, buyers could be drawn back into the market by lower mortgage rates. The Fed’s goal is to slow inflation, not crash the market.
“I would say if you are a home buyer or someone or a young person looking to buy a home, you need a little reset. We need to get back to a place where supply and demand are together again and inflation is low again and mortgage rates are low again,” Fed Chairman Jerome Powell said. to reporters last month.
Want more housing data? Follow me on Twitter at @NewsLambert.
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