Has the housing market peaked?

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It’s not time to sound the alarms, and there’s no indication that another housing market crash, circa 2008, is about to happen, but there are signs and signals everywhere suggesting that the decade-long boom in home sales may be running out of steam.

Demographics still point towards a market with strong demand – the largest cohort of millennials, the largest generation in U.S. history – are between the ages of 29-32, and the average age of a first-time homebuyer is right around 33. So there are plenty of prospective homebuyers coming of age.

Those people need somewhere to live, and there’s precious little rental inventory available, with apartment vacancies between 2-5%, depending on whose numbers you believe, but in either case being historically low. And these low vacancies have caused rental rates to accelerate at an unprecedented pace, with asking prices soaring 17% year-over-year according to RealPage, making homeownership more economical in many markets across the country.

But affordability — or the lack thereof — is one of the main factors suggesting that the housing market’s bull run may be winding down. Median home prices rose by nearly 17% in 2021 according to sales data collected by ATTOM, and have continued to rise in the first quarter of the year.

Interest rates on 30-year fixed-rate loans have risen above 5%, the highest level in over a decade, and the most rapid increase in rates in almost 50 years. The combination of higher prices and rising interest rates have conspired to make the average monthly mortgage payment dramatically higher than it was a year ago – estimates range from 20-26% higher monthly payments on the same home a buyer might have considered the prior year. Exacerbating things further, inflation at 8.5% is the highest it’s been in over 40 years, meaning that a larger percentage of household income is now needed just to cover the basics.

Unsurprisingly, this financial crunch is removing some potential buyers from the market, and requiring others to consider less expensive homes (if they can find them), or homes in smaller, less pricey markets. And while demand hasn’t completely dried up, there are signs everywhere suggesting that the tide is at least starting to ebb:

  • The NAR’s Pending Home Sales Index fell by 1.2% in March, the fifth consecutive monthly decline, and the tenth consecutive month of weaker year-over-year numbers: the March 2022 index was 8.2% lower than it was in March 2021.
  • Existing home sales have declined in both February and March, and have been lower on a year-over-year basis for eight consecutive months.
  • New home sales declined in January, February, and March, and have been lower than 2021 new home sales in 11 of the past 12 months.
  • The Mortgage Bankers Association’s Purchase Loan Index is running below both 2019 and 2021 levels (2020 numbers are skewed by the declaration of the COVID-19 pandemic in March of that year) and were down 3% from the prior week and 14% from the prior year during the week of April 20.
  • California, often regarded as a bellwether state in terms of real estate, is down 7% year-to-date in home sales, and March sales were down by 4.4% compared to the previous year, according to the California Association of Realtors.
  • Purchases using an FHA loan, often an indicator of first-time buyer activity, were down to 7.3% in the first quarter of 2022 according to ATTOM, almost two full percentage points below the prior year, and at their lowest level in 14 years.
  • Inventory levels appear to have finally bottomed out, and appear to be slowly rising, suggesting that, even with homes available for sale still far lower than normal, demand is no longer completely overwhelming supply.

Given the affordability challenges faced by many homebuyers and the trends noted above, most housing economists and industry analysts have adjusted their home sales forecasts downward for 2022. Where the general consensus had been for sales to be about equal to 2021 — some forecasts slightly lower, others marginally higher — most predictions now call for sales to fall between 5-10% compared to last year, reversing a multi-year trend.

Prices, on the other hand, continue to go up, driven mostly by limited availability in markets with high demand, and move-up buyers flush with cash from the equity they’ve accumulated during this housing boom. As demand weakens, sales volume continues to decrease, and mortgage interest rates continue to edge up, price appreciation will inevitably slow down as well.

But unlike the crash in 2008, which featured a market that was over-supplied with inventory and a flood of foreclosure homes, the more likely scenario this time is for prices to plateau rather than plummet, with some localized price corrections in individual markets. All in all, a relatively soft landing for a sizzling hot market that sometimes seemed like it would never cool off.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Rick Sharga at rick.sharga@attomdata.com.

To contact the editor responsible for this story:
Brena Nath at Brena@hwmedia.com.

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