Where Do We Go From Here?
The housing market is slow. Really, really slow. Case in point, month to date metrics for Weld County single family homes are below, along with metrics for the same period in March 2022 and 2021:
Chart: Jamison R. Walsh , REALTOR®
Source: IRES MLS
It seems like it was just yesterday that every real estate agent and lender on the planet was peacocking their way through our social media timelines declaring that the spring selling season was upon us and the housing market was alive and well. Never mind that the ongoing housing correction had been underway in earnest for over six months when this was all taking place back in February with nothing substantive having changed to indicate that we had definitively turned a corner regarding any of the factors causing the slowdown. The rational behind the proclamations boiled down to the simple belief that the housing market should pick up because it was the time of year where it always did. I suppose that when you combine that nugget of historical wisdom with an unwavering belief in the power of self-fulfilling prophesies, contemplating a universe where the housing market wasn’t roaring back to life wasn’t even in the cards for most of these folks.
Fast forward to today and we have some interesting actual data to chew on with the release of the latest Case-Shiller National Home Price Index. In the most recent report, we learned that U.S. home prices as measured by the seasonally adjusted index fell for the seventh straight month in January. Since peaking in June, U.S. home prices have fallen 3% on a seasonally adjusted basis, and 5% without seasonal adjustment.
Chart: FRED
Source: S&P Dow Jones Indices LLC
While a 3% drop in single-family house prices may seem negligible compared to the 26% peak-to-trough drop notched between 2007 and 2012, it marks the second-biggest home price correction of the post–World War II era. Today’s Case-Shiller release marks the seventh consecutive month of national home price declines after a staggering 124 consecutive months of home price increases which began in February 2012.
While there’s not much of a surprise in the latest report, it’s worthwhile to note that a non-seasonally adjusted drop of 3% or more in Case-Schiller has only ever occurred twice before: the first was in 1990, when the index dropped 3.05% before recovering. The second time was in 2008.
Additionally, the last time prices peaked (July 2006), the Case-Schiller had declined by just 1.95% a year later. In the current market, prices have declined 5% in just seven months. In other words, the current retraction in home prices is occurring faster than at any other point in the history.
Regardless, the reason for the decline is simple: housing affordability - or better put, the lack of affordability - has reached levels not seen since the Great Financial Crisis. Those paying attention already saw this eventuality coming when mortgage rates spiked from 3% to 6% just after U.S. home prices ran up 41% during the Pandemic Housing Boom.
WHERE DO WE GO FROM HERE?
All of this leaves a lot of people are wondering what’s going to happen next because the reality is, something has to break eventually. Just as it was not sustainable for home values to continue posting double-digit annual appreciation, the housing market cannot remain stagnant forever, can it?
It could, but it won’t. To that end, there are three levers that can be pulled at any given time that will have a rather immediate impact on housing market activity:
Personal Income
Mortgage Interest Rates
Home Values
If personal incomes were to rapidly increase to match the associated costs with buying a home, this would certainly get things moving. This is unlikely, so don’t hold your breath too long waiting on this one.
Mortgage interest rates are by far the most fluid factor in this equation, and a rapid shift in monetary policy could see interest rates fall very quickly. However, this is also unlikely to occur in the near future. In fact, most economists now project borrowing costs to remain either unchanged or to increase throughout the rest of the year, with some forecasting average rates as high at 7.5% for a fixed rate 30yr conventional loan in 2023.
This leaves us with the last lever: home values. Falling home values are the only lever that can be pulled that would grease the gears of the stagnant housing market at the moment. The question everyone wants to know is, will they fall enough to make 6%+ mortgage interest rates palatable to buyers?
We may find out soon enough. But until we have that answer, plan to expect more of the same.