Whither the housing market?

Can we go two opposite directions at the same time?

By Morf Morford

Tacoma Daily Index

Perhaps like the economy at large, the housing market is leaning, even moving, in two very different directions at the same time.

The near frantic bidding wars for residential homes has cooled dramatically.

The frenetic pace of real estate prices has slowed, if not declined at least in some areas.

For buyers, seller, agents and just about everyone else, the question is, will home prices drop in 2022? Or will the upward trend continue?

I think we know one thing for sure; the upward direction of prices we saw in 2021 will not continue – at least at that pace.

Here are some views from the upper levels.

Freddie Mac’s (the government-sponsored corporation that buys mortgage loans from lenders and sells them to investors) research team predicted that U.S. home prices will rise more slowly in 2022 compared to this year and last.

By their estimation, house values nationwide rose by 11.3% during 2020. They predict a gain of 6.6% for 2021. Looking ahead, the group predicted that U.S. home prices would rise by 4.4% during 2022.

A recent Reuters poll of 40 housing analysts suggested that house values in the U.S. will rise more slowly in 2022. The surveyed analysts estimated that values would rise by 10.6% in 2021, followed by a gain of 5.6% in 2022.

According to the Reuters report: “Beyond this year, U.S. house prices were forecast to moderate and average 5.6% growth next year and 4.0% in 2023.”

What keeps prices moving up?

The primary reason has to do with inventory levels.

If there is anything that defines the vibrancy of a local economy, it is the demand for housing.

In general, housing supply across the U.S. remains well below normal levels. That’s been the case for several years.

Inventory conditions were tight going into the pandemic, and they only got tighter due to an unexpected rise in home sales and a related drop in available labor – not to mention supply problems with everything from appliances to delivery trucks.

In some of the hottest markets (like Austin, Texas, Boise, Idaho and parts of the greater Puget Sound area) housing market supply levels are lower now than they’ve ever been before. This comes at a time when buyer demand remains strong across the country.

You don’t have to be an economist to connect the dots here. In cities all across the U.S., record-low inventory levels and strong demand have boosted housing prices at a steady pace.

Local, if not national, construction rates have also increased dramatically.

“Affordability” has become a near mythical unicorn for many buyers, so many are waiting or resigning themselves to renting (or something like it).

In other words, deferring home purchase is the new hot trend for many would-be home buyers.

Overall, home values are expected to continue climbing through the closing months of 2021 and, at least partially, into 2022.

But, if you’ve driven through Seattle lately (or almost anywhere really) you can’t help noticing vast construction projects – some recently completed, that will, one way or another impact the housing market.

Yes, those projects take years to go from planning to being occupied; for many of them, it has been years. And many of them are huge.

Several hundred, or even a thousand or so, unit apartment buildings in any given community must have some impact on the supply/demand equation.

COVID and its repercussions, from labor issues and supply problems to border closures (and of course the gyrating lumber prices of the past six or so months) still send shudders through the real estate markets.

More housing, and more housing options, must at least lower the momentum of higher prices.

Or at least keep us from the price inflation/real estate sticker shock, north of the border….. https://www.financialsamurai.com/what-if-the-u-s-housing-market-turned-into-the-canadian-housing-market/

According to The National Association of Realtors in June of 2021, “the median existing-home sales price rose at a year-over-year pace of 23.4%” which is “the second highest level recorded since January 1999.”

And, like our local market, homes across the country typically sold in 17 days. Or less.

National inventory stood at only 2.6 months (a healthy balanced market is about six months).

Not quite ethical lending and excessively low interest rates set the stage for the financial crisis of 2008. After that, banks and builders got squeamish when it came to new construction.

From 2000 to 2007, every year had at least 1 million housing starts and at least 2 million between 2004 and 2007. After the crash, the number of housing starts cratered to 500,000 and did not get back to a million until 2020. This, along with an increasing home-buying population, has created an intractable housing shortage throughout the United States.

The problem becomes more obvious when you look at what the coming demand for housing is and compare it to what is likely to be available. For example, Nerd Wallet ran a survey that concluded that: “28 million Americans say they plan to purchase a home in the next 12 months, and about 26 million hope to become first-time home buyers within the next five years.”

But, housing price appreciation has to slow down simply because housing is becoming unaffordable for many Americans even despite the record low interest rates and high loan-to-value ratios being offered by FHA and many banks.

House hunters are increasingly getting priced out of the real estate market, with homeownership now out of reach for most people (especially first time buyers) in more than 4 in 10 counties across the U.S.,

The number of counties where home ownership is now considered unaffordable jumped about 20% from just last year.

In short, there are multiple variables and the real estate market is being pushed, pulled and inverted from more sides than most of us imagined possible.

Can market demand stay high? Probably not.

Can prices keep going up? Probably not.

Will prices drop any time soon? Probably not.

Is this a good time to buy? Probably not.

Just remember, no matter what happens, you heard it here first.