DOWNGRADED AGAIN!

Whats up everyone!

Mark Zandi of Moody’s analytics has been consistent in his conservative forecasts for the future of the housing market. Even a few months ago when Zillow and Redfin were predicting price appreciation in the next 12 months, Zandi was already saying that price appreciation would go down to zero. Since then, he has forecasted price drops of 0-5% for some markets while others a probable 5-10% price drop.

Well, Moody’s Analytics is slashing its home price forecast once again. 

 Now, they are forecasting a peak-to-trough U.S. home price decline of 10%. And this is based on NO Recession! If a recession does happen, Moody’s expects a peak-to-trough U.S. home price decline of 15%-20%! 

Today we’ll take a look at Lance Lambert’s article in Fortune that goes through Moody’s Analytics predictions and which markets will get hit the hardest and when. Then we’ll see if Redfin agrees and what the current state of the housing  market is in right now in mid October 2022. 

So, lets dive right in.

“Affordability has evaporated and with it housing demand,” Mark Zandi, chief economist at Moody’s Analytics, tells Fortune. “Prices feel a lot less sticky [right now] than they have historically. It goes back to the fact they ran up so quickly [during the pandemic], and sellers are willing to cut their price here rapidly to try to close a deal.”

Take a look at this map provided by Lambert and Moody’s analytics which shows the degree to which regional home price are “overvalued or “undervalued” in 2022. 

You can see a wide range of areas that are either considered overvalued or undervalued. 

There are only a few blue areas which are the undervalued – I can see San Francisco, Bloomington Illinois, Montgomery Alabama, and Fairbanks Alaska.

You may be surprised by San Francisco, but there is a footnote at the bottom that says IF A HOUSING MARKET HAS A NEGATIVE PERCENTAGE, IT MEANS HOME PRICES THERE ARE LOWER THAN EXPECTED WHEN FACTORING IN LOCAL INCOMES.     

So I’m assuming that the local income for San Francisco is quite high.

They’ve given my area, the DC area, an overvalued rating of 28.51 which is about right if I look at the sold prices of our spring market this year when every house was selling way over asking.

The more “significantly overvalued” housing markets, those that are overvalued by more than 25%, include 210 housing markets with Boise (77%), Flagstaff AZ (66%), Austin (61%), and Las Vegas (60%) leading the pack.

Lambert writes that In “significantly overvalued” housing markets, Moody’s Analytics now forecasts that home prices will fall between 15% to 20%. If a recession hits, Moody’s Analytics expects that U.S. home price decline to widen to between 25% to 30% in “significantly overvalued” housing markets.

Just to give you some context, in the Great Recession, home values fell 27% between 2006 and 2012.

As we know, when a housing market enters a downturn, its the bubbly markets that are at the highest risk of home price declines. 

These bubbly markets were created during the pandemic housing boom which is why this ongoing housing downturn has   triggered a home price correction so quickly. 

In the article, Lambert goes on to show that back in 2019, Moody’s analytics only deemed 3 regional housing markets as “significantly overvalued”, BOISE CITY, ID, KENNEWICK-RICHLAND, WA and SHERMAN-DENISON, TX. 

Today, post pandemic housing boom, they deem 210  housing markets as “significantly overvalued “ so there are many housing markets that will see serious price declines.

Lambert cites the biggest correction in bubbly markets like Austin (where home values fell 7.4% between May and August), Boise (down 5.3%), and Phoenix (down 4.4%).

As for interest rates, Mark Zandi  expects mortgage rates to be around 6.5% over the next 6 months. That’s up from his previous outlook of 5.5%.

As long as mortgage rates remain that high, Zandi says it’ll apply immense downward pressure on these overvalued home prices.

Let’s pivot over to Redfin’s latest housing market update to see what they are saying about interest rates and the current state of the market.

“Mortgage rates well over 6% are spooking homebuyers,” said Redfin Deputy Chief Economist Taylor Marr. “Sellers are pulling back in this market, but buyers are pulling back even more.  It will take a few months before the prices of closed sales start to reflect this shock to the market.”

Homebuyers have lost 29% of their purchasing power since rates were at their lowest in early 2021. 

Take a look at this chart which assumes a $2500 month budget with 20% down payment, annual property tx of 1.25% and annual insurance of .5% of the purchase price.

At the beginning of 2021 with an interest rate of 2.65%, this buyer could afford to buy a house for $533,955. Today, with an interest rate of 6.66%, that same buyer could afford to buy a house for $379,825.

That is crazy!

Other statistics that cover the 4 week period ending October 2 are that 

• Active listings (the number of homes listed for sale at any point during the period) fell 1% from the prior four-week period. On a year-over-year basis, they rose 3%.

So, although inventory is up year over year, it is down from a month ago.

• New listings of homes for sale were down 18% from a year earlier.

 This is most likely due to sellers not wanting to trade in their low interest rate to buy another house with a much higher rate so they are choosing to stay where they are rather than sell and buy.

• Pending home sales were down 25% year over year, the largest decline since May 2020.

So less homes are going under contract. Buyer demand is down due to high interest rates and the fact that housing is simply unaffordable.

• Homes that sold were on the market for a median of 32 days, up a full week from 25 days a year earlier and the record low of 17 days set in May and early June.

This makes sense as well since buyer demand is down.

• On average, 7.7% of homes for sale each week had a price drop, a record high, up from 3.9% a year earlier.

Although this has nearly doubled since this time last year, I am still surprised this number isn’t bigger. It will be interesting to see if this number continues to go up in the coming weeks and by how much.

• Months of supply—a measure of the balance between supply and demand, calculated by dividing the number of active listings by closed sales—increased to 3.2 months, the highest level since July 2020.

Although this is higher, 3.2 months is still a very low number of months of supply available on the market. 

Traditionally, they say A balanced market has 5-6 months of supply, more is a buyer’s market and less is a sellers market but thats not always true.

 You can see here that in 2019, we were at 3 months of supply as well. https://www.nar.realtor/blogs/economists-outlook/inventory-and-months-supply

• 31% of homes sold above list price, down from 45% a year earlier and the lowest level since February 2021.

This number is based on houses that went under contract 30-45 days ago so has a lag time to it so we will see what it says about todays sales 30-45 days from now. 

That being said, I am still seeing multiple offers and escalating prices where I am in the DC area.

What about where you are? Are you seeing multiple offers still? More inventory? Price reductions? Comment below