The pandemic’s housing boom is finally running on fumes. Home sales are falling. Inventory levels are rising. And home sellers are cutting list prices at the fastest clip since 2019.
This Great Deceleration is a lot bigger than a seasonal cooldown. The economic shock of higher mortgage rates means borrowers are getting stretched thin to a degree unseen since 2006. That’s why home shoppers in April and May finally balked at record home prices. This shift, Moody’s Analytics chief economist Mark Zandi tells Fortune, is the start of a full-blown housing correction. Zandi predicts the year-over-year rate of U.S. home price growth will plummet from the all-time high of 20.6% to 0% by this time next year.
On Wednesday, we learned that U.S. purchase applications last week were 20.5% lower than the same week in 2021, according to the Mortgage Bankers Association. Compared to the height of the pandemic housing boom, purchase applications are down 40%.
Over the past year, the monthly principal and interest payment on new mortgages has shot up a staggering 35%, according to Freddie Mac. For perspective, private-sector wages grew 4.8% over the same period. That spike is a direct result of both record home price growth and higher mortgage rates. It also adds up to an additional $670 per month. That has “obliterated affordability,” tweets Kiefer.https://datawrapper.dwcdn.net/gbfMu/1/
This housing slowdown, of course, is by design. Earlier this year, financial markets, in response to Federal Reserve actions, priced up mortgage rates. That saw the average 30-year fixed mortgage rate spike from 3.11% in December to 5.09% as of last week. In the eyes of the Fed, if it can slow down the housing market—a major driver of inflation—it can begin to rein in overall inflation.
This sharp contraction in mortgage applications is similar to the one that began in 2006. That, of course, turned out to be the onset of a housing slump that culminated in a nationwide housing bust in 2008. But Zandi doesn’t think we’re headed back there. This time around, homeowners are in much better financial shape. Additionally, he says, this historic run wasn’t underpinned by a credit rush of bad mortgages like we saw in the early 2000s.
Zandi doesn’t foresee U.S. home prices falling nationally over the coming year. However, he forecasts this “housing correction” will likely result in 5% to 10% price reductions in significantly “overvalued” housing markets like Boise and Charlotte.
Source: Fortune.com, Lance Lambert
Fundamental economics tells us that home price growth and income growth are interwoven. Neither can outrun the other for very long. That is what’s concerning about the pandemic’s housing boom: Over the past year, home price growth (20.6%) is four times greater than income growth (4.8%).
That disconnect has more economists flirting with the most hated two words in real estate: housing bubble.
Moody’s Analytics chief economist Mark Zandi tells Fortune it’s premature to use that term. A bubble, in his mind, would require both speculation-driven price growth and overvaluation. That said, we do meet at least one element of a bubble: overvaluation. Historically speaking, Zandi says, U.S. home prices are now priced ahead of what underlying economic data (i.e. incomes) would support.
But the overvaluation, by historical comparison, varies greatly by market. The housing pandemic boom—which is now coming to an end—was hardly even, with uprooted remote workers sending home prices in markets like Austin, Boise, and Charlotte skyrocketing well above the national rate of growth.
To find out where things stand at a local level, Fortune reached out to CoreLogic to see if it would rerun, using the latest data, the proprietary housing analysis the company provided us in April.
The real estate firm calculated a market risk assessment for around 400 metropolitan statistical areas. CoreLogic aimed to find out whether local income levels could support home prices. The finding? CoreLogic now deems that 67.9% of U.S. regional housing markets are “overvalued.” Back in April, CoreLogic’s analysis had 64.7% of housing markets as “overvalued.” Meanwhile, CoreLogic now says only 24.5% of U.S. housing markets are “normal” and just 7.6% are “undervalued.”
The April analysis was built using final home sales figures from February, while this latest analysis uses final data from March, the reason being that sales figures take several weeks to become final.
Those “overvalued” housing markets now face a test. Mortgage rates, which have jumped from 3.11% to 5.1% over the past five months, have pushed the housing market over the top. New home sales, existing home sales, and mortgage applications are all plummeting. Inventory is rising fast, as are the percentage of home listings cutting their price.
Simply put, the pandemic housing boom is ending.
But does a cooling housing market mean home prices will soon fall?
Over the coming 12 months, CoreLogic forecasts U.S. home prices will still rise another 5.9%. However, the real estate firm calculates that some regional housing markets have elevated odds of seeing a dip.
In order to determine the likelihood of regional home prices dropping, CoreLogic assessed factors like income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates, and inventory levels. Then CoreLogic put regional housing markets into one of five groupings:
- Very high: over 70% chance of a price dip
- High: 50%–70% chance
- Medium: 40%-50% chance
- Low: 20%–40% chance
- Very low: 0%–20% chance
Among the 392 regional housing markets CoreLogic measured, 44 markets qualified for the “medium” group, and 22 markets crept into the “high” group. CoreLogic categorized only four markets as having a “very high” likelihood of a price drop: Bend, Ore.; Prescott, Ariz.; Lake Havasu City, Ariz.; and Bridgeport, Conn.
A separate analysis by Moody’s Analytics is more bearish. The financial intelligence firm rates 96% of the nation’s largest 392 housing markets as “overvalued” relative to what local incomes can support. That includes 149 housing markets that are “overvalued” by at least 25%. Heading forward, Zandi expects U.S. home price growth to plummet from a 20% year-over-year rate to 0%. At the same time, he expects 5% to 10% home price drops over the coming year in America’s most “overvalued” housing markets.
In order, Zandi says these “juiced-up” regional housing markets are the most likely to see home prices decline: Boise; Colorado Springs, Colo.; Las Vegas; Coeur d’Alene, Idaho; Tampa; Atlanta; Fort Collins, Colo; Sherman, Texas; Jacksonville; Idaho Falls, Idaho; Lakeland, Fla.; Greeley, Colo.; Longview, Wash.; Charleston, S.C.; Albany, N.Y.; Denver; Clarksville, Tenn.; Greensboro, N.C.; Charlotte.
Source: Fortune.com, Lance Lambert
As home buyers continue their searches in an active and competitive fall season, the nation’s top-performing markets in October are all affordable alternatives to their nearby big-city counterparts.
Topping realtor.com®’s October list was Manchester, N.H., about an hour northwest of Boston. Homes in Manchester are selling in under 24 days—about 21 days faster than the overall housing market. Properties there are receiving about 2.8 times as many views on realtor.com®.
“Affordability and strong local economies remain very much top-of-mind for today’s buyers,” says George Ratiu, manager of economic research at realtor.com®. “With home prices reaching record levels this year, many buyers are still finding themselves locked out of expensive cities. Many of the markets on our list are small to mid-sized within a reasonable commute distance of a major employment center but with much more affordable home prices.”
Realtor.com® identifies the top-performing housing markets each month by pinpointing which areas have seen the quickest sales and fetched the most views at its site. The average median list price in the 20 markets topping its list in October is nearly 16% lower than the median price nationally. Homes on the list were a median of $320,000 compared to the nationwide median home price of $380,000, realtor.com® says.
Here are the 15 markets that topped realtor.com®’s October list:
- Manchester, N.H.: $419,000 (median listing price)
- Burlington, N.C.: $295,000
- Eureka, Calif.: $489,000
- Rochester, N.Y.: $211,000
- Elkhart, Ind.: $219,900
- Lafayette, Ind.: $227,500
- Fort Wayne, Ind.: $224,900
- Johnson City, Tenn.: $300,000
- Jefferson City, Mo.: $179,900
- Rapid City, S.D.: $386,000
- Raleigh, N.C.: $425,000
- Topeka, Kan.: $175,000
- Concord, N.H.: $389,900
- Springfield, Mass.: $310,000
- Worcester, Mass.: $399,000
Source: Realtor Magazine
All-cash purchases rose to their highest level since the first quarter of 2015, according to a new report released by ATTOM Data Solutions, a real estate data firm. All-cash purchases comprised 34% of all single-family house and condo sales in the third quarter. In some markets, all-cash transactions represented more than half of sales.
Cash sales represented the largest share of all transactions in the third quarter in Columbus, Ga. (74.6% of all sales); Atlanta (69%); Macon, Ga. (59.3%); Youngstown, Ohio (56.6%); and Detroit (56.2%), according to ATTOM Data Solutions.
All-cash sales have risen the most in Atlanta and Detroit over the last year.
Some Buyers Using iBuyer Backing to Make All-Cash Offers
Institutional investors—who tend to make up the bulk of cash transactions—reached their highest level in the market since the first quarter of 2014, according to ATTOM Data Solutions. They accounted for 7.3% of all single-family house and condo purchases in the third quarter. The states with the largest percentages of sales to institutional investors in the third quarter were Arizona (17.4% of all sales); Georgia (13.9%); and Mississippi (12.8%).
Source: ATTOM Data Solutions