Anyone who has followed the real estate market the past couple of years has witnessed prices increase at breakneck speed. In only 24 months, the average price for an American home increased by 37%. For comparison, the largest two-year spike prior to the 2008 housing crash was 29%.
Part of this was a result of the lack of supply. Fewer people were selling their homes and fewer builders were building new homes. Consequently, demand outstripped supply. In addition, cheap borrowing continued for an extended period of time as interest rates hit near record lows.
However, the interest rate portion has taken a reversal as 30-year mortgages now average around 6% – double of what they were at the beginning of 2022. In terms of monthly payments, this equates to homebuyers affording 1/3 less house for the same payment as last year. Mortgage applications are also down 16% on a year-over-year basis, while refinancing has all but halted.
What the Federal Reserve Says
When asked about housing, Federal Reserve Chairman Jerome Powell made the following statements:
“We saw [home] prices moving up very, very strongly for the last couple of years. So, that changes now. And rates have moved up. We are well aware that mortgage rates have moved up a lot. And you are seeing a changing housing market. We are watching it to see what will happen.”
“How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure. Obviously, we are watching that quite carefully. It’s a very tight market. Prices might keep going up for a while, even in a world where rates are up. So, it’s a complicated situation and we watch it very carefully.”
“I’d say if you are a homebuyer or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”
Is This a Rare Period?
Historically speaking, outside of the Great Depression, and after the housing crash of 2008, year-over-year home price declines almost never happen in the United States. But today’s circumstances could lead us into a rare period in which home prices do indeed fall. It’s telling that Powell didn’t close the door on the possibility of home price declines when he said, “We are watching that quite carefully.”
A small decline, or at least a pause in home values increasing, wouldn’t necessarily be bad for the country. With home values shooting up so quickly in recent years, homebuyers, particularly first-time home buyers, were seeing an ever-increasing percentage of their pay going to housing costs. The result limited the amount of discretionary income they have to spend elsewhere, hurting the overall economy as a drag on consumer spending.
Basic economic theory teaches that home price growth and income growth are interwoven, and neither can outrun the other for long. And that affordability crunch has only been worsened by recent soaring mortgage rates. In fact, over the past six months, the typical new mortgage payment has spiked 52%. With wages increasing, an above average pause, or drop, in home values wouldn’t need to be all that long before housing as the overall percent of income falls back to more tenable numbers.
How Much Could Housing Fall?
Rising rates won’t necessarily help solve the lack of supply problem. In fact, it may exasperate it. Those who have low mortgage rates are less likely to consider selling their home. On the other hand, Moody’s Analytics’ Chief Economist Mark Zandi told Fortune that he believes a spike in mortgage rates will push the housing market into a full blown housing correction.
In the near future, Zandi expects year-over-year home price growth to decline from the 20.6% we were seeing to 0%. In significantly “overvalued” housing markets, he expects 5% to 10% home price declines. If we do have a recession, Moody’s said it expects a 5% decline in U.S. home prices and a 15% to 20% decline in “significantly overvalued” housing markets.
His analysis should remind everyone that real estate is hyperlocal and drastically different in different areas. As they say with real estate, “Location, Location, Location,” and even with the large 2008 real estate crash, the Pittsburgh region specifically remained relatively unscathed.