Is The Housing Market Crashing
Is The Housing Market Crashing? Shift Happens. With the recent shifts in the Real Estate Market, fluctuating Interest Rates and overall economic uncertainty, many people are left wondering, is the real estate market crashing?
The year over year growth may have slowed down, similarly, the median home price seems to be flattening out however, that doesn’t indicate a crash is looming.
As rates dipped down to just 4% during the first quarter, homebuyer sentiment has improved. Fannie Mae reports that the number of Americans who believe that it is a good time to buy increased by 5.5. Americans’ Confidence in Housing Nears Survey High.
“The real estate market is thawing in response to the sustained decline in mortgage rates and rebound in consumer confidence – two of the most important drivers of home sales. Rising sales demand coupled with more inventory than previous spring seasons suggests that the housing market is in the early stages of regaining momentum.” – Sam Khater, Chief Economist at Freddie Mac
We’re seeing a cooling of the housing market, but nothing that indicates a crash.
Why is the real estate market beginning to slow?
Factor #1. Affordability
The real estate industry is facing a basic economic problem: lots of people want to buy homes but can’t realistically afford to do so in their current geographic area. This is because affordability has become an increasingly acute issue over the past decade. The weakness is not just rates, but high home prices.
Home values surged dramatically in the last two years, as demand outpaced supply, especially on the lower end of the market. One factor that continues to keep the Bay Area a seller’s market is the strength of the local job market.
Companies like Apple, Google, Facebook, and other tech giants show no signs of slowing their growth – nor in their hiring. This will continue to put pressure on the housing market in the Bay Area, where lack of inventory due to high demand has been the number one reason behind its astronomical price growth.
Although prices increased in 2018 in California, they are no longer rising as much, and sales are slowing notably. According to the latest data provided by CoreLogic, Data released in February 2019 shows that the rate of home price increases across the U.S. has continued to slow.
California Association of Realtor’s Housing Affordability Index (HAI) showed slight improvement, with 32% of households able to afford the median priced home compared to 28% in the last quarter of 2018. While a welcome improvement, affordability remains low and continues to be California’s #1 market challenge.
Factor #2. Mortgage Rates
One of the main reasons the housing market began to turn was the rising mortgage interest rates. The Federal Reserve having raised interest rates eight times since December 2015.
The rise in mortgage rates reduces the pool of eligible homebuyers. The same thing happened after rates jumped in 2013, following the so-called taper tantrum, when the Federal Reserve indicated it would reduce the amount of money it was putting into the economy. Mortgage rates surged, but then fell back again, and home sales recovered.
The more expensive it becomes to secure a loan, the less money buyers have left to spend on a property. After several weeks of rising rates, the 30-year fixed-rate mortgage (FRM) dropped. Mortgage rates decline to their lowest level in nearly 2 years: The 30-year fixed-rate mortgage decreased for the sixth consecutive week. It averaged 3.82% down from 3.99% the week prior and 4.54% a year ago. According to Freddie Mac, shopping around for an additional mortgage quote can save a borrower an average of $1,500.
Factor #3. General Uncertainty
The housing market is a large part of the vast U.S. economy — so it’s going to experience a ripple effect in 2019 from changes in other parts of the economy. Such as employment, education, infrastructure, credit, politics, consumer sentiment, and many other components.
However, there’s one factor that all parts of the market need to thrive and work well together, and that’s predictability. That’s the security that you know what to expect with a reasonable degree of confidence tomorrow, next week, next month, and next year.
When it’s difficult to predict what to expect tomorrow, next month, or next year, we go through fear. Generally speaking, there’s an overall “wait and see” strategy on future movement — all of which results in challenges for the housing industry.
Even though the overall economy in the U.S. is robust, the feeling of uncertainty is growing. There’s quite a bit of unpredictability surrounding inflation, economic growth, jobs and wages, and future economic policy.
The housing market is just one part, but a large part, of the vast U.S. economy — so it’s going to experience a ripple effect in 2019 from changes in other parts of the economy, such as employment, education, infrastructure, credit, politics, consumer sentiment, and many other components.
However, there’s one factor that all parts of the market need to thrive and work well together, and that’s predictability. That’s the security that you know what to expect with a reasonable degree of confidence tomorrow, next week, next month, and next year.
When it’s difficult to predict what to expect tomorrow, next month, or next year, we have fear to take on major financial commitments. Generally speaking, there’s an overall “wait and see” strategy on future movement — all of which results in challenges for the housing industry.
Even though the overall economy in the U.S. is robust, the feeling of uncertainty is growing. There’s quite a bit of unpredictability surrounding inflation, economic growth, jobs and wages, and future economic policy.
FINAL THOUGHTS
While consumers’ more favorable mortgage rate outlook suggests continued support for housing affordability, potential homebuyers still face supply constraints. Although inventory is still historically low, it’s important to realize the inflection point we’ve experienced in mid-2018. In just several months, the amount of inventory is back to where it was at the end of 2012. And despite more “For Sale” signs going up, there is still a very real housing shortage at a time when there is strong demand for homes.
So it’s not as if a ton of people are purchasing tons of homes that they can’t afford, as there simply aren’t a ton of available properties on the market.
And, builders aren’t putting up enough abodes to alleviate that problem due to a variety of reasons, including a lack of available land, construction labor, and regulatory burdens.
A necessary answer to the inventory shortage is for the construction of new homes to increase. But issues with zoning to allow for new homes to be built or redeveloping existing properties slow the process down, in addition to labor shortages in the construction industry and tariffs on Canadian lumber imposed in late 2017 by President Donald Trump’s administration.
Hopefully public and private stakeholders can work together and build off a handful of good examples to rework how rental buildings are funded and delivered.
“Price growth has been too strong for several years, fueled in part by abnormally low interest rates. A mild deceleration in home sales and Home Price Index growth is actually healthy because it will calm excessive price growth — which has pushed many markets, particularly in the West, into overvalued territory.” – Ralph DeFranco, Global Chief Economist at Arch Capital Services Inc.
Interest rates are low, income is rising, and home prices have experienced mild deceleration over the last 9 months. If you are considering buying a home or selling your house, contact me today so that can help you understand this data at the local level and its impact on you.
