Housing market transitioning, affordability top challenge
Just when you thought the housing market couldn’t get any crazier, it did. March’s Home Sales Report is a marsh up of more contradictions than local real estate professionals have even seen.
If nothing else, it should be clear that the days of basement-level mortgage rates are over. The 30-year fixed-rate average is at 5% and headed higher. Dr. Lawrence Yun, chief economist at the National Association of REALTORS®, says that “At a 5% rate, home sales this year may fall by 10%.”
If local sales declined by 10%, it would put annual sales back to where they were at the end of 2020 and give inventory a pause to begin rebuilding. An added inventory positive is a current Realtor®.com survey that suggests 66.4% of prospective home sellers will put their homes on the market during the next six months. Adding the new homes and townhomes now under construction would begin moving inventory toward more balanced market conditions. We haven’t had balanced market conditions – a measured by inventory – since the first quarter of 2018. And it was beginning to tighten at that time.
The big question that draws the most jawboning from pundits and angst among consumers is what higher rates will have on prices. The most recent rate increase means buyers of median-priced homes face mortgage payments 40% higher than they were this time last year. So, an answer to that question has a lot of ifs.
CoreLogic and some of its partners rolled out a study earlier this month titled “Watch these overvalued housing markets as home price growth begins to decelerate.” It was accompanied by a map of the U.S. with housing markets colored red, gray, and blue. Red was the color for the 65% of U.S. markets that the study rated as overvalued. The local market was in the red zone.
“With robust home price growth since the onset of the pandemic, many markets could now be considered overvalued, particularly when comparing the price growth to the rate of local income growth,” Selma Hepp, deputy chief economist at CoreLogic, told a reporter for Fortune.
That fits the local market situation. Home prices and rents have increased significantly higher than local wages, and it didn’t happen in concert with the pandemic. It’s been that way for at least the past five years. March’s 22% increase in the median home sales price is almost three times the current inflation rate and more than three times the average wage increase rate.
But just because prices have been labeled as overvalued doesn’t mean the bottom is about the fallout. Almost all forecast models predict that home prices will increase this year.
The explanation goes this way.
Increasing mortgage rates will help derail the unsustainable price growth rate. At the same time, the combination of a still-tight inventory, the migration of new residents to the area, and the pent-up local demand of first-time millennial homebuyers will continue pushing prices higher but at a slower growth rate.
Locally the number of millennials combined with the oldest members of GenZ who are beginning to look at becoming homeowners make up a dominant share of the local population. And it’s estimated that a little better than one-in-four millennials still live with their parents or other relatives.
There will be all sorts of issues to be sorted out as the market stabilizes. Still, the biggest current identifiable challenge is affordability.
There’s no doubt that the current housing market path will force some buyers out of the market. That will make for a less competitive, but not ideal, market. The best path, as Yun points out, is more active construction and more supply thus less aggressive gains in prices. Hopefully, the surge of new home construction here in NE Tenn. and SW Va. will lead our market that way.
NETAR is the voice for real estate in Northeast Tennessee. It is the largest trade association in the Northeast Tennessee, Southwest Virginia region, representing over 1,600+ members and 100+ business partners involved in all aspects of the residential and commercial real estate industries. Weekly market reports and information for both consumers and members are available on the NETAR website at https://netar.us