Stability is Coming Back to the Market
In all markets, whether we’re considering equities, fixed income, or real estate, reasonable availability leads to price moderation and stability. And all markets function in a healthier way during stable, more predictable time frames.
All markets (their rises and dips) are heavily determined by supply and demand. The wild bidding wars last year, due to the national housing shortage, has sharply declined as more and more homes are being put on the market. Also, listings are remaining on the market for more than a few days, heralding a return to normalcy and stability.
In the first six months of 2022, the number of home sales have declined from their 2021 highs. This is signaling a return to pre-pandemic levels. Yet caution is still called for, with about half as many homes being built as compared to 2007. But, at least, we are heading in the right direction.
Statewide, for example, June saw price drops in 34.5% of homes.
Another reason home sales are stabilizing is the sharp rise in interest rates (And when interest rise, mortgage rates always follow.) Last year mortgage rates were the lowest in history, averaging 2.3% for a 15-year fixed-rate mortgage and 3% for a 30-year fixed-rate mortgage.
As of August 24th, the average rate for a 15 and 30-year fixed rate mortgages were 5.1% and 5.9% respectively. And the Federal Reserve is planning more rate hikes during this year. Obviously, when rates rise this quickly, there will be less buyers, forcing sellers to lower their asking price.
But interestingly, many experts think that buyer demand, while weaker than in 2021, will still be strong. But why? Because the extra money buyers will have to pay monthly due to higher mortgage rates should be offset by lower home prices. The buyer, in essence, will lose on the one hand, but win on the other.
Also, there’s a demographic factor that many analysts overlook. The number of people in their prime home buying years (25-34) is 18% higher than in 2006.
But one more touch of caution: The number of houses on the market (and especially) the number of new homes) should continue to be low due to the labor shortage and lingering supply chain issues - but not as low as they were in 2121.
Buyers have another advantage, as well which should serve to temper prices: According to all reports there are more sellers who must sell than buyers who must buy.
To conclude, we can see the complexity of the market with multiple forces pulling in opposite directions. But we can say with reasonable confidence that prices are no longer skyrocketing and will, likely fall for the reasons explained. And just as importantly, the market is stabilizing.