The United States housing market is blazing with real estate properties partying in full swing. In the past two years, we have seen non-stop bidding wars, low inventory, and price upsurges. Flighty sellers are sifting through numerous offers, and feverish buyers are compelled to pay more than the asking prices.
The 30-year mortgages are starting to transcend 5%, demand in the application is declining, lenders are beginning to shorten their workforce, and there are predictions that mortgages can hit 8% in 2025. These events only exhibit that the housing market is reaching its peak. Not to mention that the property tax reckoning is coming.
The last time the United States housing market seemed this bubbly was back in 2005 to 2007. Later came the crashing of housing values, bringing undeniable disastrous consequences.
In this article, we will talk about why and where they are beginning to fall, the amount sellers are downsizing their asking prices, and where mortgage rates are likely to shoot up throughout the rest of the year.
Change in the Housing Market
From the lowest mortgage in history, we shifted to the highest in the decade in just a matter of two months. At the same time scale, there was a slowdown in the housing price growth in addition to plunging mortgage demand and growing unaffordability.
According to Norada Real Estate, the upsurge in the house-price growth will be less transitory than the proliferation in consumer prices as the United States housing market will persist struggling with housing shortage for many months to come.
Four primary categories spark price growth in the housing market, including low-interest rates, an insufficient supply of homes in the market, expensive housing materials, and a shortage of homebuilders.
- Low-interest rates. Due to historically low rates of interest, buyers are given purchasing power to afford expensive houses for low monthly payments. This pushed the prices of housing higher.
- Insufficient supply of homes in the market. With a short inventory of available houses in the market, buyers are left with no choice but to bid high amounts on the leftovers in the housing market supply to get their hands on the property.
- Expensive housing materials. The prices of lumber and steel are currently spiking, and this jump in price gets passed on to the housing market consumers. Not to mention that the supply chain bottlenecks and constraints in shipping caused the housing materials to arrive late.
- Shortage of homebuilders. Given the fact that only a few people are willing to work in this field, it has become relatively hard for the supply to keep up with the demand. Obviously, we know what comes next: high demand and low supply lead to high prices.
Are we in a housing bubble?
The soaring home prices don’t necessarily mean that we are in a housing bubble. The sharp uptick in the prices of houses isn’t driven by anticipations of huge price gains in the past decades. This suggests that the housing market isn’t undergoing a traditional bubble.
A set of various unique factors are at play over the last two years of the pandemic that weren’t part of the typical equation during the housing crash. The pandemic-induced lifestyle changes are work habits that have pushed massive demand for housing, and a worldwide supply chain crisis has ushered serious investors’ storage. This mismatched drove climbing mortgage rates.
In contrast to the housing bubble back during the financial crisis in 2008, forecasts don’t show that people wouldn’t lose their homes this time around. This is because Americans are in better financial shape than they were more than ten years ago. They now have less debt and more cash than they used to have. Additionally, the housing boom wasn’t driven by tremendous over-borrowing in the early 2000s.
Housing buyers nowadays have the resources to support the purchases, which is valuable for the vibrancy of the market. And in case the prices truly cool off, it might be a piece of bad news as this would create opportunities for buyers who have been staying on the sidelines, waiting for houses to become more affordable.
Shifting Back the Housing Pendulum
Objectively, the bad market conditions aren’t meant to last forever. This pendulum would eventually swing back in the other direction, and the balance wheel is already turning through the following undertakings:
Increasing interest rates
The Federal Reserve announced a series of price hikes in an effort to bring down the highest inflation that people have seen in the past forty years. This would push mortgage rates higher than it already is.
According to CME FedWatch, with an 87% probability, Fed would bring prices up to 2.0%- 2.25% — which is eight times higher than where we currently stand today. If this happens, this will make a history of the Fed’s sharpest pace of tightening since 1994.
If you don’t know how powerful interest rates are, here’s an example. If you can afford to pay $1,000 every month at a 3% interest rate, you would have $240,000 worth of loan to spend on whatever it is that you want. However, if the interest rate spikes up to 6.5%, the same amount of $1,000 can only give you $160,000. Imagine such a huge difference!
Rising inventory
It’s no surprise that the housing inventory is pretty low in comparison to historical averages. Housing inventory is a reckoning of the houses that are actively marketed.
Month Supply Inventory (MSI) measures housing by calculating the number of months it would take for the inventory of the market to sell. Basically, this only means that the availability of housing can be gauged by a month’s supply it would take at the current sales pace for the supply of the housing market to be depleted.
Housing inventories remaining at historic lows show that the market is equalizing which is a piece of good news for buyers. Even though the inventory is still down overall from previous years, it has carried on growing month over month.
Interested homebuyers can still capitalize on low mortgage rates. However, they would need to act quickly in this extremely competitive market.
Housing sales
As buyers set up a ceiling on how much they could just afford, housing sales dropped to 2.7% throughout February and had another drop by 4.1% in March. These numbers have shown that fewer people are buying houses now that their prices have increased.
According to an analyst, home sales could drop as much as 25%. Following the supply and demand rule, this event could lead to a substantial price decrease since inventory would build up. Although the housing demand is still high, a lot of sellers are starting to lower their asking prices.
Even though what we are seeing now isn’t a bubble, the real estate market isn’t completely immune to disruption.
The Housing Market Cool Down
Housing prices won’t ease up anytime soon. It would take a little while before the inventory of available homes matches up with the market demand. The market could be in for a transition this year as it fares with higher mortgage rates.
According to experts, it might take two years before the monthly inventory returns to pre-pandemic bars. The estimated year is around 2024 or 2025.
