We Need to Talk About Pressurized Affordability and Why It Matters So Much

Historically speaking, home prices usually only fall significantly once supply gets high enough that Sellers are forced to finally cave. But in this housing cycle, we are seeing neither a supply glut nor a flood of distressed properties and yet, we are beginning to see home prices slide. Here are the figures for Weld County for the past three months:

Data current as of 9/28/2022. All Data from IRES® MLS.

Despite the massive increases in inventory recently, supply remains extremely tight. In July, months of supply jumped to 1.7 months and remained the same through August. Despite this, we are a far cry from the 6 months of supply that is generally considered a balanced market. Weld County is not alone here. In fact, a similar trend has now begun to spread across much of the country. Nationwide, home prices are falling despite supply levels remaining relatively low.

So why are prices falling? It all boils down to pressurized affordability. The combination of spiked mortgage rates – which hit 7.08% yesterday – and an overvalued market have pushed monthly payments far beyond what many Buyers can afford, or are willing, to pay. Minimum debt-to-income ratios have caused some Buyers to lose their mortgage eligibility altogether.

Among the nations 150 largest housing markets tracked by Zillow, 89 markets have seen home prices fall from their 2022 peaks. In 10 markets tracked by the Zillow Home Value Index prices have already fallen by more than 5%.

Similarly, John Burns Real Estate Consulting reports that 98 of the 148 markets they track have seen home values fall from their 2022 peaks.

As you would expect, markets which have been shown to be the most overvalued have seen the sharpest price declines. For example, in Denver home prices fell 4.28% year-over-year in August. Moody’s Analytics classifies Denver as a “significantly overvalued” market, with home values 42% higher than the fundamentals support.

The key takeaway here is that there is a large cohort of good people out there right now insisting that: 1. Prices will not fall; or 2. If prices fall, the retraction will be minimal and will be followed by a relatively quick recovery. Their argument is predicated on the basic supply and demand theory that we are all familiar with. But what I am saying, and what the data is showing us more clearly day-by-day, is that there is much more to the story here than simple supply and demand. Pressurized affordability is quickly becoming a variable that carries enough impact to outweigh the traditional supply and demand influences. To that end, so long as the Fed continues to willingly lay the housing market on the altar in its war against inflation, pressurized affordability is here to stay.