Yes, We're In A Housing Recession. What Next?

It’s true. By all commonly accepted definitions, we are in a housing recession. The National Association of Homebuilders sums up how we got here pretty well:

“Rising mortgage rates, high inflation, low existing inventory and elevated home prices caused housing affordability to fall to its lowest point since the Great Recession in the second quarter of 2022. According to the NAHB/Wells Fargo Housing Opportunity Index, just 42.8% of new and existing homes sold were affordable to a typical family. As more households are priced out of the for-sale market, a number of key housing metrics — including existing home sales, new home sales, single-family permits and single-family starts — have experienced significant year-over-year declines, characterizing the ongoing housing recession. Some markets are now seeing price declines as well.”

Regionally, home prices have already begun to retract from their pandemic high 43% price increases, with the shift in home values between May 2022 and August 2022 below:

• Greeley: -1.02%

• Fort Collins: -3.48%

• Boulder: -5.35%

• Denver: -4.28%

The reason we're vulnerable to falling home prices is pretty simple. The Pandemic Housing Boom saw home prices across the country soar far above what incomes would historically support. The Fed has been clear that they intend to “reset” the housing market, but Jerome Powell has been frustratingly noncommittal about whether the Fed’s monetary tightening would depress home prices, although he admitted that much in June.

Fast forward to September, and we have our answer. June 2022 kicked off a monumental drop in housing activity. Since then, we’ve seen both home sales and construction activity go much lower. But as the data has continued to roll in for August, we now have clear evidence that the market downturn has moved beyond the first stage (i.e. a sharp drop in housing activity) and into the second stage (i.e. falling home prices).

Okay, so now what?

First off, the longer mortgage rates stay elevated, the more the housing market is going to feel the Fed’s “reset” mode. Simply put, that means prices will continue to fall. The degree to which this happens depends largely on whether or not the Fed can hit their inflation targets and how long it takes them to get us there.

Second, I am predicting that we will see a sharp drop in the number of active listings both regionally and in Weld County. As the Pandemic Housing Boom fizzled out this summer, inventory went through the roof. In Weld County, inventory jumped 206% between February and August while closed sales tanked buy nearly 40% on a year-over-year basis.

But that inventory spike is already starting to fizzle out. Sellers are starting to realize that Buyers are done paying top dollar. So, rather than taking less, some Sellers are simply pulling their homes off the market and staying put. What’s more, the “rate lock-in effect” is going to become more of a factor as time goes on. The fact is, a vast majority of outstanding mortgages have rates below 5% - with many below 3%. Selling now means giving up a historically low mortgage rate, and the ensuing payment jump is simply too unappealing for move-up Buyers.

For the time being, most of the folks at BrainTrust, Inc. seem to agree that tight inventory will keep us from seeing a full blown housing crash, but that alone will not be enough to prevent a home price correction.