Aaron Robbins

After years of record low mortgage rates and record high house prices, it’s only natural that something would have to happen to pour some water on the housing market fire. Now, we are seeing days on market slowly creep up as demand is dropping faster than prices are cooling. This begs the question of how severe this correction will be.

Well, the answer is not very, according to housing economists and analysts. Rob Dietz, chief economist at the National Association of Home Builders, sums up the expectations among housing experts by saying “We’re thinking this is going to be a moderate downturn”.

Nobody was expecting the bull market to last so long. In Spring of this year, the median house price topped $400,000- the first time ever. Prices are still over 35% higher than pre-pandemic prices in most of the country. While bidding wars are starting to be a thing of the past and price drops are becoming more common, it looks like our housing market was burning so hot that it still hasn’t completely cooled off yet.

Experts Predict Prices Will Fall

Some areas are already seeing price drops, while others are not (such as us in the Catawba Valley area).

Rob Dietz puts it this way: “Most markets are going to experience price declines in the high single digits”. While a price decline of 8-9% certainly wouldn’t be comfortable, it also isn’t near as significant as what we have seen in the past. During the Great Recession, some housing markets experienced a 50 percent drop in values, while most ~33%, over 3x the amount experts are predicting in our upcoming months.

Five Reasons The Market Isn’t Going To Crash

1. Inventory is still very low: The National Association of REALTORS said there was a 3.2 month supply of homes for sale in August. In February, that number shrunk to just a 2 month supply. The lack of houses available to buy explains why many buyers still have little choice but to pay what sellers are asking (or at least 98.6% of what they are asking, which was the average sales-to-list-price ratio last month in our area). While demand has certainly dropped and is evident by less bidding wars and slightly higher days on market, these inventory levels indicate that the supply-and-demand aspect likely won’t become so reversed that the market crashes. Here in Catawba Valley, we have been teeter-tottering back and forth between 2 and 3 months of inventory for the past year.
2. Lending standards are much stricter: In 2004-2007, there was something called “liar loans”. A liar loan was where borrowers didn’t need to document their income to lenders, so mortgages were offered to nearly anyone- regardless of credit history or down payment size. It’s safe to say they learned a lesson from the crash shortly after because today, lenders impose much tougher standards on borrowers. Thanks to this and the general public growing better with their finances, the typical credit score for mortgage borrowers in the second half of 2021 reached a record high 786, according to the Federal Reserve Bank of New York. Greg McBride (Bankrate’s chief financial analyst) said it best: “If lending standards loosen and we go back to the wild, wild west days of 2004-2006, then that is a whole different animal. If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.”
3. Mortgage rates will drop again: We have seen mortgage rates soar lately from what we were accustomed to just a year ago, in an effort to protect Americans from the high inflation we are facing. Most lenders, however, are expecting inflation to peak this year. As inflation falls back under control, interest rates will once again drop down. Fannie Mae, a government-sponsored lender, expects rates to fall back down to 4.5% for a 30 year fixed-rate in 2023. 4.5% is less than half of what experts are expecting rates to be by the end of 2022. While no lender is suggesting that buyers should try to time the market for the best rate possible, it does provide lots of hope for buyers who will be able to refinance to a better rate in the near future.
4. Foreclosures are far less imminent: During the covid-19 pandemic, the banks stopped issuing foreclosure notices to borrowers. This caused foreclosure rates to drop to record lows in 2020. In addition to that, some studies show evidence that many Americans came out of the Covid-19 pandemic wealthier than they were when it started. As far as foreclosures go, the requirements to be approved for a loan are much stricter today than they were in 2004-2007, so many buyers are already in a better financial position that they were in the past. Most homeowners also have large equity cushions created through the rapid appreciation of values lately. The result is that our housing markets are unlikely to be hurt by a wave of millions of foreclosures (like during the Great Recession). Without a massive wave of foreclosures, there will be much less reason for actively marketed homes to crumble in value- there isn’t a huge supply of foreclosures on the horizon.
5. Builders didn’t build quickly enough to meet demand: After 2007, homebuilders backed off of their workload, and never really ramped back up to pre-crash levels. Now, it’s impossible for them to buy land and get approvals quickly enough to solve the demand issues we are (and have been) facing. They were building quite a bit still over the past several years, but now with the market not as promising many of them have once again lowered their production levels. More demographics than ever are looking to take advantage of all of the benefits of owning, and there simply aren’t enough new houses being built to accommodate all of the new buyers. Greg McBride says “As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. It won’t happen overnight.”