News Will the housing market ever get better?


Aug 12, 2022
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When will the housing market cool off? The madness shows no signs of slowing - CNN
Ellen Coleman had never received so many offers on a house in her 15 years of selling real estate.

She listed a fixer-upper in suburban Washington, DC for $275,000 on a Thursday. By Sunday evening, she had 88 offers.

"The offers just kept coming," she said. "I felt like Lucy with the chocolates. I'm thinking, 'This is just out of control.'"

Of those 88 offers, 76 were all-cash, said Coleman, who works for RE/MAX Realty Centre. There wasn't even enough time for all of the bidders to visit the property. She said 15 offers were sight unseen.

The four-bedroom, 1,800 square-foot home sold for $460,000, nearly a 70% increase from the asking price.

In fact, the inventory of available homes for sale is now at a record low, driving competition and home prices ever higher across many regions of the country. With demand for homes remaining strong, it's hard to imagine when the market might become more affordable and that has left many buyers wondering whether they should act now or just wait it out.

Property boom: US home prices surge at fastest pace on record
The median price of a single-family home climbed 14.9% to $315,000 in the fourth quarter. That was the biggest surge in data going back to 1990, according to the National Association of Realtors.

Prices rose in all 183 metros measured by the group and 161 had double-digit growth compared with just 115 of them in the third quarter.

Housing Market Gains More Value In 2020 Than In Any Year Since 2005
After a record-setting year of home sales in 2020, the housing market still shows no sign of cooling off.

U.S. housing gained about $2.5 trillion in value in 2020 — the most in a single year since 2005, according to a new Zillow analysis. The full stock of U.S. housing is now worth $36.2 trillion.....

Zillow expects 2021 to be even stronger, possibly exceeding last year's $2.5 trillion gain. “Builder confidence, perhaps in reaction to the boosted demand, hit record highs and more homes are being built as a result,” said Zillow economist Treh Manhertz. “Add that together and you see why the housing market gained more than in any year since the Great Recession.”

According to the CoreLogic Buyer/Seller Market Indicator, which measures the ratio between sold price and list price, buyer competition reached a new peak nationally in October and November when the ratio climbed to 0.996 – the highest level since 2008, when the data series began.

Home sales hit 14-year high in 2020, pushing prices to record levels - CNN
Pandemic-driven demand sent total 2020 home sales to the highest level since 2006.

Still, even the most avid buyers are bumping up against barriers in today’s housing market. Record low supply and record high prices are limiting the exceptionally high demand.

Housing Market Update: Home Prices Increased a Record 17%, Pending Sales Up 19%
Key housing market takeaways for 400+ U.S. metro areas during the 4-week period ending March 7:
  • The median home-sale price increased 17% year over year to $328,350, an all-time high. This is the largest increase on record in this data set, which goes back through 2016.
  • Asking prices of newly listed homes hit a new all-time high of $349,975, up 10% from the same time a year ago.
  • Pending home sales were up 19% year over year and up 3% from the four-week period ending February 7. In the two weeks since pending sales dipped during the winter storms over the 7-day period ending February 21, the weekly number of pending sales is up 17%.
  • New listings of homes for sale were down 17% from a year earlier.
  • Active listings (the number of homes listed for sale at any point during the period) fell 41% from 2020 to a new all-time low. This is the largest decrease on record in this data, which goes back through 2016.
  • 56% of homes that went under contract had an accepted offer within the first two weeks on the market, well above the 45% rate during the same period a year ago. This is another new all-time high for this measure since at least 2012 (as far back as Redfin’s data for this measure goes). During the 7-day period ending March 7, 59% of homes sold in two weeks or less.
  • 44% of homes that went under contract had an accepted offer within one week of hitting the market, up from 32% during the same period a year earlier. This is also an all-time high for this measure. During the 7-day period ending March 7, 48% sold in one week or less.
  • The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, increased to 99.8%—1.7 percentage points higher than a year earlier and an all-time high. During the 7-day period ending March 7, the ratio shot up to 100.1%, the first time on record since this data series began in 2016 that the average home has sold for above its list price nationwide.
These articles are all before the interest rate tightening cycle started, prices are starting to cool and drop.

Interest rates are like gravity for real estate prices because of all of the leverage/debt involved in buying real estate. In North America, 5 to 1 leverage (20% down) is a common "safe" amount of leverage for example, and you can go as high as 20 to 1 (5% down). The amount you qualify for to borrow is around 30-40% of your monthly income after taking out any other debt obligations you have. But as rates go up, the interest component going into a monthly mortgage payment goes up as well, lowering the total amount you can borrow on that 30-40% of your salary.

The higher rates go, the less borrowing power everyone has, which means prices are unlikely to continue going up. And if there isn't a lot of savings in the economy, prices are likely to start dropping (savings rates are at all time lows). High enough rates can make real estate prices crash due to the variable rate mortgage market. Outside of the US which mostly uses long term fixed rate mortgages (You take out a 30 year fixed mortgage at X% and the payment doesn't change ever), most mortgages are amortized over 25-30 years but the interest rate is re-negotiated in 5 year terms. The US also has some mortgages like this, but they aren't the most common. So lots of people would have qualified and got mortgages at 1-3% when baseline interest rates were at 0.25% - when their mortgage terms come up, are going to see their mortgage rates jump by about 3.5-4% or more. This effectively means you multiply the interest component of the mortgage by 2-4x or you extend the length of the mortgage a certain number of years into the future if nominal payments are fixed.

So some people are going to see their mortgage payments double and have to default (or the banks will foreclose on them because they no longer qualify for a mortgage). I expect the people to get hit the hardest will be all the guys doing high risk landlord tactics - getting low interest rate mortgages, renting the home out, using that income to buy another house, etc. The banks will take the properties and flip them to Real Estate Investment Trust's to rent out.

The actual affordability for an average person does not change much in this case though. Homes only become more affordable under a high rate environment if you have a lot of savings.

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