Without owning your home, the future could become troubled for years.
The housing market may be in turmoil for years to come.
Timing the housing markets can be futile. Although market analysts and data can provide helpful forecasts about future home prices or interest rates, no amount of tea leaves reading can keep away the harsh truth that home buying ultimately depends on luck – you might buy your dream house just before prices surge skyward, or else pay out just in time before its bubble pops.
Market breakdowns can be hard to predict in advance but often appear clear retrospectively. July 2020 was especially striking; fortunes started diverging among homebuyers creating what an expert called an unequal distribution of home ownership; it became evident that an initial housing slump had been compounded by large numbers of young home seekers and remote workers eager to purchase the property.
Astonishingly, those who purchased homes before and those who did after this turning point experienced drastic differences. People who purchased before the housing market went wild could lock down record-low mortgage rates while simultaneously accumulating hundreds of thousands in equity over several years compared to those waiting on the sidelines who saw rental costs quickly deplete their nest egg. Median home prices skyrocket by 30%, and mortgage rates rebound.
This has led to an imbalanced housing market. Each month, more millennials and Gen Zers reach the point where they want to buy a house, yet their options for purchase remain shockingly limited, especially during spring sales when sales usually pick up steam. There is no sign of an impending housing boom that would help ease the current crisis; homeowners simply do not see an incentive to move because doing so means giving up manageable interest mortgage payments and leaving low-interest payments behind them.
By drawing upon experience, we can identify when the housing market entered a brand-new phase. July 2020 may mark that pivotal point; should that happen, we might witness a “new normal” with increased scarcity, rising borrowing rates, and homeowners locked into bargains they found earlier during the pandemic, effectively entering what could become known as the Housing Ice Age.
The Housing Market Is Upside-down
Mike Simonsen of Altos Research told Yahoo! Finance that while a public health emergency might have initiated change, its roots go much deeper. The housing crisis of 2008, along with builders’ unwillingness to build more houses due to rising first-time homebuyer demand, has created an explosive scenario in real estate markets today.
Simonsen pointed out that inventory levels had reached record lows before the pandemic’s outbreak; its rapid spread exacerbated these difficulties further.
As part of its response to this pandemic, two events caused irreparable harm to the housing market: (1) When the Federal Reserve tried to stimulate it by offering extremely attractive borrowing rates at record low levels (2) As more mortgage loans than ever became defaults. Federal Reserve’s efforts to stimulate the economy resulted in a dramatic shift in buyer expectations that have had long-term ramifications. A second factor driving demand spikes was remote working’s widespread adoption and people’s sudden desire for larger spaces. This disorganization in the housing market accelerated over years of activity, sparking a panic to purchase homes in an unprecedented boom-like period. Competition between potential buyers is reaching unprecedented heights while it becomes harder and harder for individuals looking for homes to secure financing and purchase their first properties.
National Association of Realtors announced in July 2011 that the housing market had returned in an inverted V shape; first-time home buyers made up 34% of sales that year and by September, median home prices had skyrocketed 5 percent month over month in Q3, kick-starting two years of price increases fueled by falling mortgage rates (below 3 percent in many instances)
Cristian deRitis, Moody’s Analytics deputy chief economist, shared with Yahoo! Finance his insight that July was the “turning point,” with demand for remote work coupled with low-interest rates leading to the dramatic surge of market appreciation.
Pandemics’ lasting impacts can become apparent over time. Homebuyers and agents who were used to an active housing market during its initial years now face difficulties with operating in an otherwise tranquil market environment.
Altos Research believes this shortage may have its origin in decisions taken before COVID-19: the hype surrounding income-generating investment homes has resulted in approximately 8 million homes leaving the resale marketplace and being converted to income properties over time; as a result, we see today an inventory shortage which signifies something has altered itself in this new housing market.
This year’s spring season has been relatively peaceful. Inventory usually increases as people prepare to move during the summer; normally one million single-family houses would be for sale at this point; today however, only about 400,000 properties remain for sale; Black Knight, an online mortgage software and data provider stated in March there were roughly 30% less properties listed pre-pandemic levels; Realtor.com reported existing home sales were 23% down year over year in April; Danielle Hale informed Yahoo! Finance the number of listings during March to April was virtually equivalent to pandemic levels from 2020 when this plague hit the nation; which Black Knight reported pre-pandemic levels pre-pandemic levels by approximately 30%, Black Knight also stated in March that there were roughly 30% less properties on market when pre-pandemic levels existed pre 2020 when there was widespread pandemic outbreak; Realtor.com reported existing home sales reported that April was 23% lower year over last year while Realtor reported existing home sales were 23% lower while Danielle Hale told Yahoo! Finance the same thing was true between March and April when pandemic levels existed then as when we experienced its worst phase!
Hale noted that, back in 2018 or 2019, no one would have believed there would only be several hundred thousand homes available for sale by April. He further elaborated, explaining that it may be hard for people to grasp this trend as it’s illogical.
Many would-be sellers opt to remain in their homes since the mortgage rates they locked in are lower than what would be available if applying for new financing today after Federal Reserve interest rate hikes since 2021 hit bottom. This measure was implemented to counter inflation caused by a housing market boom. According to Freddie Mac, average 30-year rates have reached 6.4% – marking their highest level since the Great Recession. People have responded by not placing their homes for sale, and inventories have diminished due to these rates. According to Black Knight, 86% of US homeowners with mortgages currently pay an interest rate below 5% (half have rates under 3.5%!), well below current levels. According to Redfin data, approximately 35% have relocated within four years; this meaning even when rates decrease, they may still not rush out with purchase decisions as quickly.
DeRitis noted the high-interest rate environment’s detrimental effect on first-time home buyers. They stressed that limited housing stock available for qualified buyers, even with cash reserves, makes home ownership impossible for many first-timers. “Even if they wanted to buy, it isn’t feasible!”
Are You A Member Of The Lucky OR Unlucky
The lasting impacts of this new Ice Age are expected to last decades. Wealth among those who purchased homes prior to the turning point in the housing market has skyrocketed over recent years; according to Black Knight, as of March, the average homeowner had $185.102 of tappable equity (i.e., the amount that can be borrowed against while still owning 20% stake of home), up 54 percent from 20/20; according to Federal Reserve US, homeowners have gained $9 trillion worth of home equity since 2015.
Renters have not felt these wealth gains either; rent is becoming ever more costly. Moody’s recently reported that, according to their data collection methodology over 25 years ago, an American household needed to spend over 30% of its income just renting an average-priced apartment, according to Moody’s calculations. This marks the first-ever occasion since Moody’s began tracking this data set!
There is ample evidence to indicate those entering the housing market now will suffer as prices decrease over time. Realtor.com reported in March 2020 that $300k would have bought you an approximate 2,000 sq-foot house; today, that same amount would only buy a 1,400 sq feet property – representing a decline of 30% within three years! Furthermore, the National Association of Realtor’s Housing Affordability index dropped dramatically between August 2010 and March 2019, from around 180 to just 98 (source).
Altos Research reports that some of the “oddities” observed during the pandemic in housing markets are becoming more routine, such as buyers bidding rapidly on homes – more than 20 percent are under contract within days! Attom Data Solutions projects that all cash sales will make up 33% of single-family home and condo transactions by 2022 – an all-time record!
Long-term consequences could be dire for those who missed their opportunity to build wealth over recent years. We know many millennials live at home longer, postpone marriage and children until later, or delay buying homes despite high earnings; they also tend to have fewer savings than previous generations due to steeply rising mortgage rates in 2017. As mortgage rate changes create long-term gaps between those with cheap loans versus those facing increasing housing costs over time, making life increasingly unaffordable in coming years.
Simonsen explained, “One factor I don’t expect will change is the number of homeowners locked into their houses for over thirty years; those with mortgages that extend for such time periods don’t plan on selling in any case; these changes represent shifts among generations.
