The real estate market is on just about everyone’s mind these days. That’s because the unsustainable market of the past two years is behind us, and the difference is being felt. The question now is, just how financially strong are homeowners throughout the country? Mortgage debt grew beyond 10 trillion dollars over the past year, and many called that a troubling sign when it happened for the first time in history.
Recently Odeta Kushi, Deputy Chief Economist at First American, answered that question when she said:
“U.S. households own $41 trillion in owner-occupied real estate, just over $12 trillion in debt, and the remaining ~$29 trillion in equity. The national “LTV” in Q2 2022 was 29.5%, the lowest since 1983.”
“Homeowners had an average of $320,000 in inflation-adjusted equity in their homes in Q2 2022, an all-time high.”
What Is LTV?
The term LTV refers to loan to value ratio. For more context, here’s how the Mortgage Reportsdefines it:
“Your ‘loan to value ratio’ (LTV) compares the size of your mortgage loan to the value of the home. For example: If your home is worth $200,000, and you have a mortgage for $180,000, your LTV ratio is 90% — because the loan makes up 90% of the total price.
You can also think about LTV in terms of your down payment. If you put 20% down, that means you’re borrowing 80% of the home’s value. So your LTV ratio is 80%.”
Why Is This Important?
This is yet another reason we won’t see the housing market crash. Home equity allows homeowners to be in control. For example, if someone did need to sell their home, they likely have the equity they need to be able to sell it and still put money in their pocket. This was not the case back in 2008, when many owed more on their homes than they were worth.
Homeowners today have more financial strength than they have had since 1983. This is a combination of how homeowners have handled equity since the crash and rising home prices of the last two years. And this is yet another reason homeownership in any market makes sense.
The talk of a housing bubble in the coming year seems to be at a fever pitch as rising mortgage rates continue to slow down an overheated real estate market. Over the past two years, home prices have appreciated at an unsustainable pace causing many to ask: are things just slowing down, or is a crash coming?
To answer this question, there are two things we want to understand. The first is the reality of the shift in today’s housing market. And the second is what experts are saying about home prices in the coming year.
The Reality of the Shift in Today’s Housing Market
The reality is we’re seeing an inflection point in housing supply and demand. According to realtor.com, active listings have increased more than 26% over last year, while showings from the latest ShowingTimeShowing Index have decreased almost 17% from last year (see graph below). This is an inflection point for housing because, over the past two years, we’ve seen a massive amount of demand (showings) and not enough homes available for sale for the number of people that wanted to buy. That caused the market frenzy.
Today, supply and demand look very different, and the market is slowing down from the pace we’ve seen. This offers proof of the sudden slowdown so many people are feeling.
What Experts Are Saying About Home Prices in the Coming Year
Right now, most experts are forecasting home price appreciation in 2023, but at a much slower pace than the last two years. The average of the six forecasters below is for national home prices to appreciate by 2.5% in the coming year. Only one of the six is calling for home price depreciation.
When we look at the shift taking place along with what experts are saying, we can conclude the national real estate market is slowing down but is not a bubble getting ready to burst. This isn’t to say that a few overheated markets won’t experience home price depreciation, but there isn’t a case to be made for a national housing bubble.
The real estate market is slowing down, and that’s causing many to fear we’re in a housing bubble. What we’ve experienced in the housing market over the past two years were historic levels of demand and constrained supply. That led to homes going up in value at a record pace. While some overheated markets may experience price depreciation in the short term, according to experts, the national real estate market will appreciate in the coming year.
August home sales decreased slightly in central Indiana as sale prices and available inventory continue to trend upward. Monthly real estate statistics from F.C. Tucker Company revealed that central Indiana housing inventory increased 52.3 percent compared to this time last year, while pended home sales decreased 17.2 percent compared to August 2021. Year-to-date home sale prices continued their upward climb, increasing 13.5 percent.
There are more homes for sale today than at any time last year. So, if you tried to buy a home last year and were outbid or out priced, now may be your opportunity. The number of homes for sale in the U.S. has been growing over the past four months as rising mortgage rates help slow the frenzy the housing market saw during the pandemic.
Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains why the shifting market creates a window of opportunity for you:
“This is an opportunity for people with a secure job to jump into the market, when other people are a little hesitant because of a possible recession. . . They’ll have fewer buyers to compete with.”
Two Reasons There Are More Homes for Sale
The first reason the market is seeing more homes available for sale is the number of sales happening each month has decreased. This slowdown has been caused by rising mortgage rates and rising home prices, leading many to postpone or put off buying. The graph below uses data from realtor.com to show how active real estate listings have risen over the past four months as a result.
The second reason the market is seeing more homes available for sale is because the number of people selling their homes is also rising. The graph below outlines new monthly listings coming onto the market compared to last year. As the graph shows, for the past three months, more people have put their homes on the market than the previous year.
The number of homes for sale across the country is growing, and that means more options for those thinking about buying a home. This is the opportunity many have been waiting for who were outbid or out priced last year.
According to a recent survey, more and more Americans are concerned about a possible recession. Those concerns were validated when the Federal Reserve met and confirmed they were strongly committed to bringing down inflation. And, in order to do so, they’d use their tools and influence to slow down the economy.
All of this brings up many fears and questions around how it might affect our lives, our jobs, and business overall. And one concern many Americans have is: how will this affect the housing market? We know how economic slowdowns have impacted home prices in the past, but how could this next slowdown affect real estate and the cost of financing a home?
“Throughout history, during a recessionary period, interest rates go up at the beginning of the recession. But in order to come out of a recession, interest rates are lowered to stimulate the economy moving forward.”
Here’s the data to back that up. If you look back at each recession going all the way to the early 1980s, here’s what happened to mortgage rates during those times (see chart below):
As the chart shows, historically, each time the economy slowed down, mortgage rates decreased. Fortune.com helps explain the trend like this:
“Over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases, they continued to fall after the fact as it takes some time to turn things around even when the recession is technically over.”
And while history doesn’t always repeat itself, we can learn from it. While an economic slowdown needs to happen to help taper inflation, it hasn’t always been a bad thing for the housing market. Typically, it has meant that the cost to finance a home has gone down, and that’s a good thing.
Concerns of a recession are rising. As the economy slows down, history tells us this would likely mean lower mortgage rates for those looking to refinance or buy a home. While no one knows exactly what the future holds, you can make the right decision for you by working with a trusted real estate professional to get expert advice on what’s happening in the housing market and what that means for your homeownership goals.
You may be reading headlines and hearing talk about a potential housing bubble or a crash, but it’s important to understand that the data and expert opinions tell a different story. A recent survey from Pulsenomics asked over one hundred housing market experts and real estate economists if they believe the housing market is in a bubble. The results indicate most experts don’t think that’s the case (see graph below):
As the graph shows, a strong majority (60%) said the real estate market is not currently in a bubble. In the same survey, experts give the following reasons why this isn’t like 2008:
The recent growth in home prices is because of demographics and low inventory
If you’re concerned a crash may be coming, here’s a deep dive into those two key factors that should help ease your concerns.
1. Low Housing Inventory Is Causing Home Prices To Rise
The supply of homes available for sale needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation.
As the graph below shows, there were too many homes for sale from 2007 to 2010 (many of which were short sales and foreclosures), and that caused prices to tumble. Today, there’s still a shortage of inventory, which is causing ongoing home price appreciation (see graph below):
Inventory is nothing like the last time. Prices are rising because there’s a healthy demand for homeownership at the same time there’s a limited supply of homes for sale. Odeta Kushi, Deputy Chief Economist at First American, explains:
“The fundamentals driving house price growth in the U.S. remain intact. . . . The demand for homes continues to exceed the supply of homes for sale, which is keeping house price growth high.”
2. Mortgage Lending Standards Today Are Nothing Like the Last Time
During the housing bubble, it was much easier to get a mortgage than it is today. Here’s a graph showing the mortgage volume issued to purchasers with a credit score less than 620 during the housing boom, and the subsequent volume in the years after:
This graph helps show one element of why mortgage standards are nothing like they were the last time. Purchasers who acquired a mortgage over the last decade are much more qualified than they were in the years leading up to the crash. Realtor.com notes:
“. . . Lenders are giving mortgages only to the most qualified borrowers. These buyers are less likely to wind up in foreclosure.”
A majority of experts agree we’re not in a housing bubble. That’s because home price growth is backed by strong housing market fundamentals and lending standards are much tighter today. If you have questions, let’s connect to discuss why today’s housing market is nothing like 2008.
The housing market is already painfully tight with bidding wars breaking out all over. Now, inflation (and interest rates, right along with it) are on the rise. Just looking at the prices on property listings online has you feeling the strain on your home-buying budget.
Given that the Federal Reserve typically hikes mortgage interest rates in order to slow inflation down and the fact that you may have to compensate by settling for less house than you initially wanted, is this really a good time to buy a home?
It could be. In fact, it could be far better to buy today than to wait. Here are all the things you need to know before you decide if homeownership is really in the cards for you:
Why You Shouldn’t Let Inflation Worries Keep You From Buying
First, you need to keep in mind that sage advice about how “the best time to buy a house is always five years ago,” because housing prices tend to keep increasing over time. There are no major indications that we’re in a real estate “bubble” that will simply collapse in the near future and lower the prices dramatically, either. The issues that gave rise to the real estate bust of 2008 simply aren’t in the picture today.
Second, real estate is typically seen as a good way to hedge against rising inflation. If you continue renting, your rent isn’t going to go down because inflation is rising. In fact, your rent is likely to increase. If you lock in a reasonable interest rate now on a fixed-rate mortgage, you have the security of knowing that your monthly payment will remain predictable while other costs are soaring.
Finally, putting your money into a mortgage helps you build wealth in three different ways:
1. You start building equity: When you rent, every dollar you pay goes into your landlord’s pocket, not yours. With a mortgage, you’re putting money back into your pocket each month in the form of equity in your home.
2. You raise your net worth: Despite occasional dips in the market, a well-maintained home is only likely to rise in value over time. As its value rises, so does your net worth. That gives you far more room to access funds for other needs in the future, like your child’s education or renovations.
3. You gain a significant tax break: The interest on your mortgage and your property taxes are both significant tax breaks. That can help you keep more of your money to pour into everything from your emergency fund to vacations.
It’s also important to remember that mortgage rates still are fairly low. Still plenty low enough to make mortgages attractive to most buyers — and plenty low enough to make a mortgage preferable to a rental payment.
Waiting to buy, however, means gambling that inflation will fall, and there’s no sign that will happen any time soon.
What Else You Need to Consider About Home Ownership and Inflation
When inflation is soaring, you need to remember one critical thing about owning a home: Everything you want to do in the way of renovations and everything you need to do in the way of repairs are going to cost more.
Supply chain issues and rising fuel costs have already driven up prices on all kinds of building materials, so you need to keep that in mind when you’re viewing homes for sale. A fixer-upper may not be a big deal if you’re handy, but the cost of your supplies could be outrageous right now. For that reason, you may want to steer clear of homes that look like they need major updates.
When you are thinking about renovations, you want to make every dollar count. Put your money into the repairs and upgrades that are most economically sound and meaningful. That may mean prioritizing a new roof over stainless steel appliances for the kitchen or adding a home office instead of an extra half-bath on the main floor.
Finally, you also need to keep your overall budget in mind. Inflation is bound to lead to increases in things like:
• Moving costs
• Repair fees
• Grocery bills
• Homeowners association dues
• Insurance costs
One of the wisest things you can do when you’re looking ahead to the cost of homeownership is to make sure that you have enough money set aside — after you make your down payment on a home and pay for any essentials — to cover anywhere from six to 12 months’ worth of expenses.