The Great housing market Reset | The falling home prices

June 21, 2022

The Great housing market Reset | The falling home prices

So, in my last blog (check out: The Fed, the rate, Inflation, and the extremes | What’s next?) I talked about what Jerome Powell, Chairman of the US Federal Reserve, said in his press conference regarding the economy last June 15th.

Today I want to go over the article Fortune Magazine wrote about this conference and what the Fed had to say about inflation and the housing market. I will link the video here so you can watch the whole thing on YouTube, if you haven’t seen it yet.

But first, I want to encourage everyone to look at everything that’s happening, whether it's housing or the economy, with a better outlook. I know many of us find it hard to handle uncertainty, and I keep seeing people react out of fear. While fear and anxiety are understandable, letting yourself be led by fear often results in making things up in your mind that feed more fear, and it isn’t going to be helpful for anyone.

The one thing we have control over is how we react to everything that is happening. Whatever happens to any kind of market out there, good or bad, it all boils down to how you handle it. So, don’t freak out. Use the data to have an objective view of what’s happening. You start to realize that you were more afraid than the actual situation called for. And remember that in every type of market, you can succeed.

The Great Housing Market Reset

Believe it or not, the Fed are the ones dictating where our economy is going—whether or not they are going to raise the rate again. So let’s take a look at this article. Fortune highlights three main points about what’s next for real estate.

It is titled The Fed plans to ‘reset’ the housing market—raising the likelihood of falling home prices.

When I first read the title, I thought the word reset might actually be a good one to use for the current situation in the housing market. Maybe we should call this whole thing “The Great [Housing] Reset.”

According to the article, “Mortgage Bankers Association reported on Wednesday that mortgage applications are down 16% on a year-over-year basis.”

It is exactly what we thought would happen, and that number is probably going to go up a little bit more with the interest rate increase.

Fortune highlights three things that stood out from Powell’s conference.

First: Powell says homebuyers "need a bit of a reset"

Fortune says, “By spring 2021, inventory hit a 40-year low. That has given homebuyers little choice but to bid up home prices.”

And we all saw this happen. I even talked about how some reports say millennials (first-time homebuyers) were actually crying through this whole process of buying a home. (Check out my YouTube Live or blog about how Real Estate Makes Millennials Cry? | The Real Estate Situation)

So, what they (the Fed) are trying to do is make it more affordable for everyone. Also, it is important to note that Powell specifically brought up that inventory was significantly low.

Second: Falling home prices? Powell seems to have suggested it's possible

If you listen to Powell, what he said was that he was not sure where the home prices would go in the next few months. He did say that the Fed is watching the housing market’s situation carefully.

The article quotes Powell as saying: "Whereas the supply of finished homes, inventory of finished homes for sale is incredibly low, historically low. It's still a very tight market, and prices might keep going up for a while, even in a world where rates are up. So it’s a complicated situation and we watch it very carefully."

Fortune also says, “For a moment it sounded like Powell was about to say home prices would fall.”

Now, this?— I’m not sure where they saw that. I watched the video a couple of times, and all I saw was Powell saying that at this point they don’t know for sure, but prices might still go up despite the rate hike.

That’s why I have been keeping tabs on data almost daily and talking about it on my YouTube live videos, because we can’t really be sure what will happen as things change daily. What I do want you to understand is, as the market shifts—right now it is shifting into what we could call a more “balanced” market—the Fed’s priority right now is to get first-time homebuyers to be able to afford something.

It is easy to read more into things, but let’s try to look at data instead of making stuff up that wasn’t there, or we can’t prove was actually there.

Last month, Moody's Analytics chief economist Mark Zandi told Fortune that spiked mortgage rates have pushed us into a full-blown "housing correction." In the near future, Zandi expects year-over-year home price growth to decline from 20.6% to 0%. In significantly "overvalued" housing markets, he expects 5% to 10% home price declines. If a recession does come, Moody's Analytics said it expects a 5% decline in U.S. home prices and a 15% to 20% decline in significantly "overvalued" housing markets. (Source: Fortune)

Before you freak out, though, this is what Logan Mohtashami, Lead Analyst at HousingWire says, according to the article: “Home prices can fall, however, but for it to happen, inventory will likely need to rise much higher. Once U.S. inventory levels climb above 2 million units, Mohtashami says, home prices could begin to fall nationally on a year-over-year basis.”

I know I sound like a broken record, but it all comes down to supply and demand in the end.

Supply-and-demand has been the key to this whole thing, and other people will tell you otherwise, but the one thing that changed everything is the interest rates going up on the mortgage (it’s like doubled now). So, fewer people can afford it, affecting demand.

Ralph McLaughlin, Chief Economist at Kukun, tells Fortune that inventory has to reach a certain level before home prices are allowed to fall. He says, "It’s looking increasingly likely we’re approaching a sharp inflection point in the market."

If the inflection point spikes up, we will see a lot of price reductions and homes coming on the market. Since rising interest rates cool demand, inventory might be able to catch up a bit, allowing us to see the market slowly evening out. In this regard, the home price reductions that might happen during that evening out are just a reset. It is not a housing crash.

But regarding the interest rates, the Fed says as soon as they get control over inflation, whenever that is, they plan to, in fact, they would love to, bring the rates down.

This brings us to the last point.

Third: Powell explicitly said he’d like to see mortgage rates fall

That said, home shoppers eager for mortgage rate relief might be waiting for a while. As of last week, the Consumer Price Index was at 8.6%. The Fed won't let up on inflation fighting until the CPI returns to 2%. On Thursday, the Fed made it clear this fight could last well into 2024. (Source: Fortune, boldfacing is mine)

So, we might need to hang on and be prepared for the high rates to be around for a while.

Some data from Altos Research

I just want to remind you where we’re at regarding inventory. I shared this data from Altos Research last time as well. I use Altos Research because they update their data on a week-over-week basis, so check them out if you want to stay updated on the housing market trends.

As of June 10th, the total inventory of single-family residences for sale (active listings) in the US is 396,463 homes. If you look at the inventory we had back in 2015, we were at 1,180,000 homes. That is a significant difference, and this is what I have been telling you for months now.

In order for the market to shift towards a possible crash, the inventory needs to be significantly higher than the existing demand. And we are not there yet. In fact, even with the cooldown in demand due to interest rates hike, we are still far from that scenario.

What we are heading towards now is more of an “equal” market or “balanced” in terms of supply and demand. 

It is also good to watch out for that number, because if it does spike up, then the housing market could have some issues. But right now, we are still historically significantly low on inventory.

Another thing to look at is price reductions. The graph Altos Research released shows that price reductions started a little early this year, around the same time the news about inflation and rate increase came out, and they are spiking up higher earlier than previous trends. The percentage of price reductions might even go up to the same level as in 2018 through the summer. 

But even if it does, all it shows is the housing market is going back towards a normal (pre-pandemic) market. It is all going to depend on where the interest rates are (and will be) in the next few months.