Whats up everyone!
NO ONE wants to catch a Falling Knife! This is what KPMG chief economist Diane Swonk told fortune when talking about the process of home prices falling nationally. She explains that there is a self-fulfilling momentum to home prices falling once they start. She then goes onto say that she believes we are easily going to see large double-digit declines and that 15% next year is very conservative.
Today, we’ll take a look at the article in Fortune by Lance Lambert “KPMG: The Pandemic Housing Bubble is bursting”
to see what else Swonk is saying as well as and article by realtor.com to see what to expect in the housing market for the rest of 2022 and next year in 2023.
So lets dive right in
“It was a pandemic-induced [housing] bubble, which was stoked by work-from-home migration trends: High-wage workers going to lower second tier middle markets for more space,” said Diane Swonk, chief economist at KPMG . “We went to an extreme on Work From Home which spurred housing demand, but it has pretty much abruptly ended. It is part of the reason I think you’re seeing housing prices fall as well. The local incomes don’t support a lot of these home values.”
We’ve already seen home price growth rollover on a national basis.
Between June and August, the Case-Shiller National Home Index showed a 1.3% drop in U.S. home prices. That marks the first decline since 2012.
Here are the four big takeaways from Fortune’s chat with Swonk.
The first one is that
Spiked mortgage rates popped the “bubble”
As we all know, the Federal Reserve is fighting inflation by raising interest rates.
Although the Fed reserve does not set mortgage rates, its actions indirectly affect mortgage rates. As the Fed raises rates, so do the banks.
And once the Fed reserve flips into rate hiking mode, it’s going to spell trouble for rate sensitive sectors like the U.S. housing market. When those rate hikes turn aggressive because the central bank wants to up its inflation fight, it will be that much more intense.
And this is what’s happening now. Due to the Fed’s monetary tightening, the average 30-year fixed mortgage rate went from 2.98% to 7.1% over the past year.
That mortgage rate shock matters for two reasons.
First, historically low mortgage rates—which stimulated the Pandemic Housing Boom—are gone.
Second, the spike means many would-be buyers have either been priced out or lost their mortgage altogether.
The 2nd takeaway is that Home prices are falling—but it isn’t the 2008 story
Lambert writes that If U.S. home prices actually fall 15%, it would mark the second-biggest home price correction of the post–World War II era. Only the 27% correction between 2006 and 2012 would have it beat.
That said, the Federal Reserve says this isn’t a repeat of the 2008 crisis.
“From a financial stability standpoint, we didn’t see in this cycle the kinds of poor underwriting credit that we saw before the Great Financial Crisis. Housing credit was much more carefully managed by the lenders. It’s a very different situation [in 2022], it doesn’t appear to present financial stability issues.” Fed Chair Jerome Powell told reporters earlier this month.
Swonk agrees with Powell: “This is not a subprime crisis, they’re [the fed is] right about that.”
However, while improved lending standards and tight supply should prevent a 2008 repeat, they aren’t enough to prevent a housing correction. At least that’s how Swonk sees it.
“The interesting thing to me is how quickly some of these markets are correcting with still very tight inventories,” Swonk says.
3- Not every market will crash.
According to Fortune, the textbook definition of a housing bubble requires three things.
First, you’d see exuberant demand—boosted by speculation—rush into the housing market.
Second, spiked home prices soar well above what incomes can support and reach “overvaluation” levels.
Third, the housing bubble pops and home prices fall.
In the past 2 years, due to the low interest rates and the fact that many people could now work from home, DEMAND became manic- especially from investors and flippers.
As for the 2nd criteria, Lambert writes that Every quarter, Moody’s Analytics calculates an “overvalued” or “undervalued” figure for around 400 markets. The firm aims to find out whether fundamentals, including local income levels, could support local home prices.
In Moody’s analytics calculations for an “overvalued” market, they concluded the typical market was “overvalued” by 23% in the 2nd quarter of 2022.
That’s up from 3% in the second quarter of 2019, and above the 14% in the second quarter of 2006.
As for the 3rd criteria, Swonk says that “bust” is starting, but it will vary by market.
She takes Phoenix and Chicago as examples. In 2006, Chicago and Phoenix were “overvalued” by 32% and 48%, respectively.
However, this time around, Phoenix (which is now “overvalued” by 54%) saw a rush of speculators and out-of-town buyers, while Chicago (which is now “overvalued” by 3%) remained relatively tame.
So the markets that soared during the pandemic boom will be hit the hardest during the correction.
In fact, Moody’s Analytics is currently forecasting a 18.7% peak-to-trough drop in bubbly Phoenix. In Chicago, the analytics firm expects home prices to fall just 3.6%.
4- Falling home prices help the Fed
Fed Chair Jerome Powell has specifically said that we are in for difficult times regarding the housing market correction. He calls it a “reset”.
What he’s hoping for is that home prices come down, demand calms down and inflation retracts.
“Let’s face it, where is one of the biggest pushes on inflation right now? It’s in shelter costs. And it’s where they [the Fed] have the most power,” Swonk says. “And so, yeah, it was a stunning rise in [home] prices. An unsustainable rise—some kind of correction is needed. The problem is you don’t get to choose how big that correction is.”
And I agree w her. The housing market was unsustainable.
In the article from Realtor.com titled “No One Wants To Catch a Falling Knife’: What To Expect in the Housing Market for the Rest of 2022”, Clare Trapasso writes that the housing market appears to be in a standoff as just about everyone suddenly feels stuck.
Home prices are beginning to fall from their peaks in some of the nation’s hottest markets—but not enough to make up for the higher mortgage rates.
This is what I was talking about in my recent videos.
Buyers still can’t afford to buy with the high interest rates and the fact prices haven’t come down enough to make them affordable.
And One of the reasons prices haven’t come down is that there is still not enough inventory because would be sellers don’t want to trade in their low interest rate to buy a new place with a high one.
Maybe when Redfin offloads its iBuyer inventory this will change. For the buyers out there, I hope so.
So what’s next as 2022 comes to an end?
Many experts believe home prices will fall nationally from 10-20% like Zandi from Moody’s and Swonk from KPMG. Some markets will have even steeper price declines if they are way overvalued like Phoenix, Boise and Austin.
However, it’s important to put any price declines into perspective.
Nationally, home list prices rose 40.6% in just over two years’ time—from March 2020, when the pandemic lockdowns began, to the peak of the market this past June, according to Realtor.com data. So a 10%, 15%, or even 20% drop over a two-year span isn’t as significant as it might seem at first.
“A really important thing to remember is housing is cyclical,” says Wolf of Zonda. “We came from a massive run-up in prices, sales, demand in the housing market, and now it’s contracting. This is not new.”
I think we are going to have to see what the Fed Reserve does in the future, how the iBuyer program failures affect housing inventory and whether builders can increase confidence by offering incentives.
Right now as we enter the holiday season, I don’t think much will change with the housing market until the new year.
But what is happening where you live? Comment below, tell us where you are in the country and what you are experiencing.
Where I am in the DC area, prices still haven’t come down on good houses. By good houses I mean, in good condition, shows well and priced right. These homes are still selling with multiple offers.
It’s the greedy sellers who price their homes at the peak housing boom price that are sitting and getting reduced. And for these houses, there may be deals to get if you can withstand the current interest rates.
I hope you got some value out of todays video.