What’s up everyone
Today we’re going to take a look at this article from Forbes titled The Real Impact of a Housing Market Recession.
In this article, they go through not only the main forces DRIVING the housing recession but what happens AFTER the recession, How soon will a HOUSING RECOVERY happen and when is the best time to buy below-market value properties.
So, lets dive right in.
As we all know, the main problem we are having right now in the housing market is affordability.
According to Forbes, many experts are debating whether we are in a housing market recession or simply a correction of the meteoric climb of home prices during and after the pandemic.
The recent data officially points to a housing market recession, but some believe it’s a housing recession simply because builders aren’t building.
So what defines a housing market recession.
A housing market recession occurs when home sales decline for six months straight, which officially happened in July 2022. The National Association of Realtors (NAR) just published new data stating that existing home sales were down 5.9% for July 2022 and 20.2% from one year ago.
NAR Chief Economist Lawrence Yun went on record to state, “We’re witnessing a housing recession in terms of declining home sales and home building … However, it’s not a recession in home prices. Inventory remains tight, and prices continue to rise nationally, with nearly 40% of homes [on the market] still commanding the full list price.”
So what are the 2 main forces driving the housing market recession-
Increased interest rates (which have been manipulated by the Fed reserve to fight inflation)
Increased construction costs – which kept going higher during the pandemic due to supply chain issues.
Unfortunately these costs haven’t come down as widespread inflation has driven the prices even higher.
The combination of these 2 forces have priced out many buyers from the current housing market which has forced us into a housing recession.
So, where do we go from here? When Will we pivot from a recession into a recovery?
I like this disclaimer that they put in the article
At this point, it’s important to note that experts in the media aren’t future tellers with clairvoyant abilities. While professionals do their best to predict what’s going to happen based on accessible information, there’s nobody that can state with certainty what will happen in the future.
This is very true and although I try and bring you the most current and reliable sources every week about the future of the housing market, no one can predict the future 100%.
What we can do is track real estate movements to see the impact of a housing market recession on the economy and vice versa.
So how do you track real estate movement?
One of the ways is to see how much new construction is happening to get an idea of future inventory. We call this Homebuilding starts.
Homebuilding starts are a leading indicator of the real estate market.
The Census Bureau recently released some disappointing news.
Take a look at this graph provided by the Census Bureau.
Housing starts (new construction) dropped 9.6% in July 2022.
In addition, Homebuilder confidence fell for the eighth straight month in August as elevated interest rates, ongoing supply chain problems and high home prices continue to exacerbate housing affordability challenges accounting to the national association of home builders (NAHB).
The index hit a 49 in August, the first time it is in the negative since 2014 except for a brief plunge at the start of the pandemic .
Anything under 50 is considered negative.
We also see more home purchase contracts being cancelled.
Redfin reported approx 63,000 home purchase agreement cancellations in July of 2022 which represents about 16% of total home contracts for the month. This is the highest percentage of cancellations since the pandemic stalled home sales in March and April of 2020.
Some of these cancellations were due to buyers negotiating contingencies in their contracts for the first time in 2 years and backing out during those contingency periods.
If they request repairs after and inspection, for example, and the seller won’t agree, the buyer can simply cancel the contract if they have an inspection contingency.
Other buyers were unable to close the deals because they no longer qualified for a mortgage due to the increased interest rates.
When a buyer signs a contract on new construction, they can’t lock their rate in until shortly before closing as opposed to contract time (unless they want to pay extra for a long term lock).
So this time difference between contract and close with rates increasing drastically, may have caused buyers to have to cancel their contract Because they simply can’t afford the house with the higher rate.
“Home-purchase cancellations may begin to taper off as sellers get used to a slower-paced market,” said Redfin Deputy Chief Economist Taylor Marr. “Sellers have already begun to lower their prices after putting their homes on the market. They’ll likely start pricing their properties lower from the get-go and become increasingly open to negotiations.”
So, the big question is – when will we come out of a housing recession?
In the Forbes article, they site the four phases of the real estate cycle
Recovery, expansion, hyper supply and recession.
Since we are obviously in a recession, the next cycle will be a housing recovery cycle which they say will be the BEST TIME TO BUY BELOW-MARKET VALUE PROPERTIES.
Which bears the question How soon will a housing recovery happen following a recession? Although no one can tell you exactly when,
They site 2 keys signs that the recovery stage has begun:
- Real estate prices are rising after bottoming out, prices are increasing from their lowest point.
- The general economy is recovering, employment is increasing and there are signs that the economy is doing well.
You also have the government’s actions in boosting the economy which is why many experts are eagerly awaiting the Fed’s September interest rate announcement.
So where does this leave us right now.
For sellers, a housing recession means you need to change you expectations from the past 2 years. You may not have multiple offers and you may need to adjust your price.
You also will most likely need to deal with inspections and repairs unlike the past 2 years so budget some money for them or be prepared to offer the buyers a credit towards any repairs.
Real estate is very localized so what is happening in one area can be vastly different than others but these are good things to keep in mind to have a successful transaction in this changing market .
For buyers, there still isn’t much inventory and interest rates are higher than they have been the past 2 years.
Construction costs are still high and builder sentiment is low.
But – if you do find a house that meets your budget and criteria, you have a better chance of negotiating the contract and including contingencies that will protect you and possibly get you some repairs fixed or a credit towards fixing them.
Ultimately, there are benefits of home ownership
1- you pay the same about each month for 30 years rather than being at the mercy of a landlord raising your rent.
2- You may be able to lower that amount in the future if you can refinance to a lower rate
3- There are tax benefits to owning real estate.
4- Your home will most likely appreciate in value over a long time horizon.
5- You’re paying down the loan over time, providing you with equity in an asset.
6- You need somewhere to live, so owning a home has a functional use.
LEt’s take a quick look at the present data on the housing market provided by Redfin to see where the market is trending.
- For the week ending September 1, 30-year mortgage rates rose to 5.66%. That’s down from a 2022 high of 5.81% but up from 3.22% at the start of the year.
Homebuyer mortgage payments are up 38.5% year over year.
- Pending home sales were down 18% year over year.
So less buyers are putting homes under contract.
- New listings of homes for sale were down 16% from a year earlier, the largest decline since May 2020.
Active listings rose 4.2% year-over-year. This is the number of homes listed for sale at any point during the period
- Homes that sold were on the market for a median of 26 days, up from 21 days a year earlier and the record low of 17 days set in May and early June.
- On average, 7.5% of homes for sale each week had a price drop, a record high but unchanged from the prior four-week period.
- The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, fell to 99.8% from 101.4% a year earlier. In other words, the average home sold at its asking price. This was the first time since March 2021 the ratio has fallen below 100%, meaning the typical home is now selling for below asking price.
And Mortgage purchase applications were down 2% week over week, seasonally adjusted, and were down 23% from a year earlier during the week ending August 26.
So all of this shows the changing of the market but inventory is still super low.
I hope you got some value out of today’s video. Its a lot of work, but I think its important to bring you the most updated information so you can make the best decision for you and your family.
The American dream is not dead. It’s just harder than ever but hopefully a more balanced market will help with affordability
If you would like to see more videos on the housing market, check out these 2.
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Thanks for watching. I do appreciate it. Bye