New homes in Century Communities’ Cielo at Sand Creek residential neighborhood in Antioch, California, on Thursday, March 31, 2022.
David Paul Morris | Bloomberg | Getty Images
Chicago realtor Jeremy Fisher headed to Florida after Christmas and expected a mostly relaxed five weeks after a slow second half of 2022 left him with a string of unsold listings to end the year.
Instead, the Compass broker flew back to the Windy City three times during its offseason, when seven homes were signed and his husband drove their baby home alone from Florida. The great housing bust, it seems, has found something of a bottom.
“There’s always a right time for anyone to buy a home,” Fisher said. “For the most part, people have come to terms with interest rates.”
After just a few months in the tank, is the US housing market close enough to a bottom that it’s time for those on the sidelines to at least consider buying as spring shopping season approaches?
Signs are mounting that the big price drops — and mortgage rate cuts — that buyers wanted aren’t happening, at least not anytime soon.
Goldman Sachs has lowered its estimate of the peak-to-trough decline in nationwide home prices to 6 percent from 10 percent at the end of January. Online housing market Zillow now expects prices to rise slightly in 2023. Existing home sales, which hit an annual pace of 6.5 million in early 2021, have started to stabilize at around 4 million, with the National Association of Realtors forecasting 4.8 million for the year. Meanwhile, mortgage rates, which fell below a national average of 6 percent on Feb. 2 after more than doubling to nearly 7.4 percent since mid-2021, are back up to 6.75 percent, a scorching jobs report said was due in January.
Not bankruptcy, but a stalemate between buyers and sellers
Instead of a price slump like after the mid-2000s housing bubble, a stalemate is developing, says Logan Mohtashami, senior analyst at HousingWire in Irvine, Calif. On the one hand there are buyers who would like to have homes as affordable as they were in 2019. But a large proportion of them either have to move or can afford to move despite higher prices and rates. On the other hand, there are sellers who are not forced to act because they have cheap mortgages and plenty of equity for the time being. So far, sellers are hanging on hard in most cities. Even small increases in demand can keep prices stable or push them up because inventories are so tight, Mohtashami said.
The recipe for the housing market in 2023 is that prices are roughly stable nationwide but steadily falling in some regional markets, interest rates are falling but not hugely, and buyers’ incomes are rising. Experts believe that together they will improve affordability, perhaps to near-normal historical levels, but still well below where homebuyers were when mortgage rates were 3 percent or even lower.
“Households have two incomes and you have to make about $100,000 to buy a house,” Mohtashami said. “There are a lot of dual-income couples who can do that. It gives you more buying power than people know.”
No yield from 2008 or 3% mortgage rate
The main reason house prices aren’t falling as much as they were after 2008? Because the market is not flooded with houses that push prices down like it was back then.
Well-funded banks aren’t under as much pressure as they were then, with foreclosure rates less than a tenth of those seen during the housing crisis. Neither are households, with debt loads near historic lows and few homeowners owing more on their mortgage than their home is worth. Serious crime rates skyrocketing after 2006 and leading to 6 million foreclosures fell by almost half last year to less than 0.7% of mortgages, according to Fannie Mae. Unemployment is the lowest in 54 years, allowing homeowners to either act or hold on lightly to their current homes – and if they’re among the 85 percent of homeowners whose mortgage rates are below 5 percent, many will stay rather than increase buy expensive house with a more expensive loan.
All of this means that the supply of homes for sale is likely to remain tight, limiting price declines.
Affordability is bad now, after rate hikes and Covid-related price hikes, but it was worse. And we’ve all been spoiled by recent history: after the financial crisis, housing affordability literally doubled nationwide as interest rates collapsed and prices fell to all-time highs. It had maintained most of those gains until the Covid price surge, even as property values rallied.
“Interest rates will fall in the second quarter, but we don’t see a sharp drop that should keep people waiting,” said Nadia Evangelou, director of real estate research at NAR. She forecast that 30-year mortgages will drop to around 5.75 percent. “Buyers are realizing the 3 percent rates aren’t coming back.”
The affordability of housing is stretched
The NAR’s closely watched affordability index, which accounts for prices, rates and buyers’ incomes, is much lower than in 2019 but still at the levels of the late 1980s and early 1990s. At current levels, the Housing Affordability Index says the average buyer can afford the average US home — but barely. In 2020, the median buyer could afford the median home with a 70 percent buffer that was the product of 3 percent loans, Covid-related income support, and the residual impact of large home price declines between 2006 and 2011. The average since 1980 is that median homebuyers have about 20% more income than the median home needs, Evangelou said.
So why would anyone buy houses that are suddenly less affordable?
For Maggie Neuder, a customer at Fisher’s in Chicago, the answer came down to wanting a new apartment and being able to afford one. After seeing interest rates of 6 percent when she bought her first home in 2007, she’s not intimidated by today’s rates, she said. The 41-year-old finance executive bought a bigger house than she needed to get through the quarantine during Covid and now wants a smaller apartment in the city’s Lincoln Park neighborhood, so she flipped.
To calm her buyer’s interest rate fears, she makes a final loan large enough to lower the mortgage rate on the buyer’s loan for the first two years by two percentage points in year one and one percentage point in year two — a big move homebuilders also use, to sell new houses. To get the money back, she extorted a similar concession from the seller of the house she is expected to buy in April.
“People see refinancing as a bad thing,” she said, reckoning that she’ll likely be able to lower her payment within a couple of years. “I don’t think we’re going back to the under threes, but somewhere in the fours. Even if interest rates don’t fall below 6, I’m comfortable with my mortgage.”
Fisher says his recent buyers fall into three camps. At both ends are first-time buyers who have never had a 3 percent loan and older buyers who pay cash. Interest rates around 6 percent don’t bother much, he said. In the middle are climbers who initially thought more about the rates. But they do workarounds like Neuder’s to get what they want, Fisher said. These buyers likely fueled the surge in new mortgage applications that occurred when interest rates fell earlier this winter.
“People have thought about where interest rates are, and they’ve adjusted,” Fisher said.
Combine the wage increases of recent years with the deflation that has begun to show in market-based housing data over the past six months, and the most glaring cases of distorted regional markets have already begun to correct. Another boost is coming from solid rates of new household formation, said Daryl Fairweather, chief economist at Redfin.
Where are real estate prices now
The average home price is down 6 percent in 20 major metro areas and 3.5 percent in the nationwide index, according to the S&P Case-Shiller Price Index.
As expected, the recently hot markets have suffered stronger setbacks. The Case-Shiller Index is down 12 percent in San Francisco and 8 percent in Phoenix. In Sacramento, home prices have given back nearly half of their Covid-era gains, said Ryan Lundquist, a local appraiser who blogs about the market in the California capital. In Metro Tampa, where prices have risen 69 percent during Covid, prices are down just 3 percent, according to Case-Shiller.
Add wage growth – wages rose about 5 per cent last year, according to Zillow data – and the effective price of housing has fallen sharply in some places while remaining well above pre-Covid levels, Skylar Olsen said , Chief Economist of Zillow.
“Even if values are down a bit since August, if you buy an average home in February 2020, you have annual gains of 11 percent,” Olsen said.
Wage growth is one of the reasons even some recently hot markets are still finding buyers, said St. Petersburg, Fla. realtor Jeffrey Clarke. In fact, he recently stopped a client with a house in another city from selling his apartment in St. Petersburg, convincing him the crash he feared was not coming.
According to NAR numbers, affordability in the Tampa metro area is now poor, with the average buyer earning only 80 percent of what it takes to purchase the average home. But Tampa is close enough to balance that Clarke doesn’t see anything like 2008-2011 coming, when the average Tampa home lost half its value.
“Since nothing has fallen off, nobody freaks out,” he said.
The math on mortgage rates and wage growth
The big flaw in the thesis that only small price drops are coming is that so many large regional markets like Tampa remain mismatched with local incomes, and many of them were in much better equilibrium two years ago. Another reason is that San Francisco, Phoenix, and Las Vegas saw prices fall more than 1% in January alone, according to Zillow, making forecasts for relatively stable prices seem shakier.
Much of Florida and Texas, as well as markets like Asheville, NC and Denver, had relatively affordable housing by 2020, but medium-sized homes are now 20 to 30 percent too expensive for the average local income, according to NAR data released in October . In much of California, NAR affordability indices are 50 or below, indicating homes cost twice what local income can support. But much of California has always been less affordable.
To get back to average affordability since 1980, mortgage rates would need to be cut to about 4.6 percent while wages rise 4 percent and prices remain stable to get back to average affordability since 1980, meaning homes median about 20 percent cheaper than the median family can afford, NAR’s Evangelou said. Wage growth has slowed somewhat lately but is still above 4% – in the latest non-farm payrolls report wages rose 4.4% yoy, albeit slightly below the 4.6% gain in December.
Mortgage rates remain volatile, and market hopes at the start of 2023 – that the Fed would cut interest rates before year-end – have recently dimmed as the labor market and consumers are too strong to inspire confidence that current rate hikes are having enough impact to curb inflation. After five weeks of decline, the average contract rate on 30-year fixed-rate mortgages rose to 6.39% from 6.18% the previous week. A year ago the rate was still 4.05%.
How fast could affordability get better? For a $300,000 loan, a drop in fixed rates from 6.75 percent today to 4.5 percent with no price change would change the monthly payment on a 30-year loan by about $425, a drop of about 23 percent . Going to 6 percent cuts a payment by about $150, or 8 percent. A 5 percent increase in income this year for the average shopper would add about another $400 a month.
“If interest rates drop to 5 percent, things will get radically better very quickly,” Olsen said.
In a place like Tampa, where prices have risen rapidly during Covid, the affordability revision will likely combine near-flat prices for a year or two, salary increases and lower interest rates, said Clarke. But hotter markets like Tampa may need more price cuts to bring affordability back to historical averages, Evangelou said.
The market standstill is likely to last for months at least because its main underpinning is going nowhere. Sellers will continue to have the benefit of being equity capitalized and sitting on a low interest rate starting in 2021 or earlier, Mohastami says. Some buyers remain priced outside of the market or can afford a smaller home than they want. And some will use workarounds like mortgage buybacks or parental support to buy homes until affordability recovers. Sellers of new homes will be making buybacks and have been using incentives to limit list price cuts since last summer.
“It’s kind of become the norm,” Neuder said.
In some markets, affordability will likely remain an issue long enough that policy solutions will be needed, Olsen said. She mentioned solutions like building denser housing or allowing more homeowners to add additional housing units like basements or lofts so families can share the cost.
In most places, the likely outcome is affordability that falls somewhere between today’s market, where many potential buyers are overwhelmed and demand is low, and the buyer delight that has prevailed for nearly a decade. The way to get there is rising wages, falling inflation that is pushing interest rates down, and house prices that are giving back a yet-to-be-determined chunk of 2021-22 gains — a proportion that’s small in most places so far.
“I want it to stay the same for the next two years,” said Clarke, the Florida realtor. “You can’t go up 20 percent a year for a decade. You end up with a $5 million two-bedroom, two-bath condo.”