The housing market is dipping | Is it a good time to buy real estate?

June 6, 2022

The housing market is dipping | Is it a good time to buy real estate?

Let’s talk about “The Great Deceleration.”

The housing market downturn was given this moniker by Fortune magazine. I'm not sure if it'll catch on, but it seemed like a fine name to me.

Although adding "great" to it makes it seem a little scary, it is more of a deceleration of the current housing market.

Right now, I'm seeing a lot of people forecasting the real estate market for the years 2023 to 2025, and I find it a bit funny because no one knows what will happen that far into the future.

Even experts can just provide facts and predict what will happen based on that data. And because those forecasts won't be accurate for long-term predictions, it's difficult to predict what the housing market will be like in 2025 based on what we know now.

For example, Zillow has to change its forecast report monthly because as more data comes in, and as new things happen and new developments pop up, earlier predictions are often proven wrong.

The Great Deceleration

Let’s dive right into the first article from Fortune magazine. It’s titled “The cooling housing market enters into the Great Deceleration.”

Fortune begins with this: “…with the COVID-19 recession sending the unemployment rate to its highest level since the Great Depression in April 2020, how could residential real estate not sink? Only it didn't happen.”

Many people believed the real estate market would tank when the pandemic struck, and we were all stressing out, unsure what would happen. My friend David Childers from Keeping Current Matters and I predicted at the time that the opposite would happen, and that real estate prices would rise. And it transpired just as we predicted.

“The pandemic coincided with the five-year window (between 2019 and 2023) when millennials born during the generation's five largest birth years (between 1989 and 1993) hit the peak first-time home buying age of 30,” Fortune continues.

This “five-year window” is something not often talked about. But the pandemic coincided with that, and it meant that a lot of millennials in their late 20s to early 30s were looking to buy a home. Plus, there were a lot of people looking to move out of the metros, and these millennials (whom a lot of people thought would never become homebuyers) began racing to buy homes.

This is also a good example of how predicting things can get kind of dangerous.

The article goes on to talk about the present situation, saying, “As data rolls in for April and May, it's clear that the pandemic housing boom is cooling—fast. We're now transitioning into a new phase, or as Fortune calls it: the Great Deceleration. Heading forward, the breakneck rate of home price growth is expected to enter into a period of deceleration.”

Three main reasons for this shift in the US housing market

First, according to Fortune, “Rising mortgage rates rise cause ‘demand destruction’ as would-be homebuyers get priced out.”

This is true. They now have to pay more all of a sudden, and prices are continuing to rise. Altos Research has data showing the median home prices are still rising and there isn’t a slowdown [yet] as of last week.

“Second, the overheated 2022 spring market has pushed us over the edge into what housing economists call an overvalued housing market,” the article continues.

Remember those statistics that showed the places most people moved into during the pandemic? There was more inflation in those areas, causing those metros to be “overvalued.”

It is a good idea to keep an eye on those areas because they have higher risks of the market going down a little bit.

Fortune also says, “Simple economics dictates that home price growth (up 19.8% over the past year) can't outpace wage growth (up 4.8% over the past year) by wide margins forever.”

The challenge is that the gap is widening, which must not happen over a prolonged period of time.

“Third, the U.S. economy is losing steam. The Fed isn't just attacking exuberance in the housing market: It's also attempting to slow down the red-hot labor market,” Fortune continues. “Fed chair Jerome Powell has acknowledged that pulling inflation back down will likely require an uptick in unemployment.”  

The Great Resignation

We also need to keep an eye out on unemployment because it is pretty low right now, but if it goes much higher and rises too fast, that could indicate that the market might be tweaking a little bit further than we thought.

“If the Great Resignation has its own Great Deceleration, it'll undoubtedly trickle over into the housing market. There's something else. If a recession does come, employers could use their increased economic leverage to force staffers back into the office. And if that happens, it could dry up the WFH [work-from-home] buying boom,” Fortune says.

We are already seeing some of the employees being asked to go back to the office.

Home sales and mortgage applications are falling

We're also seeing other regions, such as Atlanta, where market prices have peaked and then stabilized, with fewer multiple offers and longer days on the market. In most housing markets in the United States, there is still an inventory shortfall. However, there are still some markets that are really hot.

“On Tuesday, the U.S. Census Bureau reported that the annual rate of new home sales fell 17% between March and April. It was also the lowest reading for new home sales since the depths of the COVID-19 recession in April 2020,” according to Fortune. “It isn't just new home sales that are falling. This week marks the ninth week over the past three months that new mortgage applications have fallen, according to the Mortgage Bankers Association.”

If you look at the Purchase vs. Refinance index graph from Mortgage News Daily, applications for mortgages and refinances have both dropped significantly and purchases have gone down because fewer people can afford to buy homes.

Fortune adds, “Meanwhile, Redfin reports that the share of homes with price reductions continues to rise while the share of homes getting multiple offers is decreasing.”

I would like to discuss this article by Redfin since they made a solid argument, but they also missed an important point.

This article is called “Housing Market Update: Nearly 1 in 5 Sellers is Dropping Their Price, the Highest Rate Since October 2019.”

What they forgot to mention is that the average price reduction (typical in normal markets) during the summer is 30%.

So, don’t freak out if you see a price reduction of around 19% to 20%.

According to Redfin, “Measures of homebuying competition are plateauing as early-stage demand posts its biggest annual decline since April 2020. However, mortgage rates may have leveled off, which could prevent demand from dropping even further.”

Mortgage rates have actually fallen somewhat, from 5.5% to 5.1%. This is important to remember because demand in some locations is still high. It’s not only regional, but it also relies on the price point in question.

I was talking to Richard Powell, my friend from Boise. He claims that entry- and mid-level price points are still in high demand, but that desire for higher-priced items has slowed.

Leading indicators of homebuying activity

Redfin also states some leading indicators of home buying activity. One of them, according to the article, is that “Fewer people searched for ‘homes for sale’ on Google—searches during the week ending May 21 were down 13% from a year earlier.”

This one you could blame directly on interest rates being a little higher, pricing people out.

“Touring activity from the first week of January through May 22 was 29 percentage points behind the same period in 2021, according to home tour technology company ShowingTime,” Redfin also says.

That was interesting to me. There are fewer people looking for homes, but there is also less inventory in some locations.

Lastly, Redfin says, “A record 57% of homes sold above list price, up from 50% a year earlier.”

It demonstrates that people are still purchasing homes.

And yet, people skip these little details and focus on the decline in mortgage applications, the dip in new home sales (by 16.5%), and magnify the news about price reductions in order to reach the conclusion that the real estate market is going to tank.

Final Thoughts

Let’s look at the data. It's important to make educated and informed guesses as to what’s going to happen. Also, do yourself a favor and don’t predict too far into the future (2023 to 2025). So many things can happen between now and then.

If it is time to buy for you, go ahead and buy. If you’re going to sell, go ahead and sell. Don’t get caught up in what the alarmists say, because from the data that we have right now, there’s no need to second-guess your decision.

If things change in the next few months, and interest rates rise to the 7% to 8% range, or if the war escalates to the point where other countries join in, or if unemployment rises to unacceptably high levels, that'll be a whole different story.

But that isn't where we are at the moment.

As of May 2022, the housing market is not on the verge of crashing.