Housing report

Latest Housing Report: Appreciation Slows – But Will We See Another 2008? | by Lauren Como | June 2022

An update on the latest in housing

Photo credit: Canva, author

Jn morning, I logged on to LinkedIn to find that the latest housing article was “Home Prices Hit an All-Time High”.

According to articlehouse price growth hit a record high in March – I don’t think any of us are surprised.

The article reported that nationally, home prices were 20.6% higher than March 2021, according to the S&P CoreLogic Case-Shiller Home Price Index.

That’s above the 20% annual growth seen in March and the biggest year-on-year increase in more than three decades.

The fastest growth was in cities in the Sunbelt, with prices climbing 34.8% in Tampa, Florida, 32.4% in Phoenix and 32% in Miami.

That said, before we get too excited about the rate of appreciation, we now have rising interest rates (the average mortgage rate is now over 5%), and many are wondering whether or not we’ll see a correction. .

We are already starting to see more inventory on the market and a cooling in demand in many major cities.

We don’t have a crystal ball and no one knows if there will be another pandemic or another black swan.

That said, we can discuss price, supply, demand, income, and other factors driving the market, to better understand what is happening with housing and the likelihood of a complete crash.

No stock + high demand = insane prices. Here’s what’s driving demand:

Everyone is hoping that high interest rates will have a huge impact on demand, but it’s important to consider that housing demand isn’t just driven by interest rates.

Other variables that impact demand are:

  • Employment/Income: When house prices rise much faster than wage growth, it will push buyers out of the market.
  • Family changes: (need a new home to accommodate children or going through a divorce and having to separate).
  • Move
  • House price appreciation/depreciation: (Eventually, when housing depreciates, it improves affordability and eventually – not immediately – will increase demand.
  • Lending Practices: (Flexible or soft lending practices increase demand, strict lending practices decrease it).
  • Consumer sentiment: (i.e., if the general consensus is that economic desperation is on the horizon, this may discourage potential buyers from buying a home).

We know affordability is a huge issue (more on that below), but my opinion/forecast is that relocation (or lack thereof) will also slow down demand.

Of course, individuals and families will continue to move across the country, but with the return to work directive from many large employers, working from your grandmother’s basement in Vermont 5 days a week is not more “a thing”.

Many employers are moving towards a hybrid work environment, requiring their employees to come into the office at least a few days a week.

Yes, demand is slowing, but it’s still not providing affordable housing

Affordability is the biggest challenge facing buyers right now, and so this is starting to diminish the demand for housing as many buyers have been driven out of the market.

While we’ve seen wage increases for workers over the past year, the wage increases aren’t enough to buy a house in many major cities (more on that later).

That said, even though appreciation rates are still above normal, according to this reportthe appreciation rate decreases every day as enough buyers leave the market.

Demand no longer sustains those insane growth rates of 32-35%.

Let’s talk about rentals

In many large cities that have seen significant growth, there is a decent gap between the increase in home values ​​and the increase in rent.

Using my hometown of Phoenix as an example, home values ​​have increased 25% while rents have only increased 13%.

Just a few weeks ago, median monthly rents were about $400 lower than the median monthly mortgage payment. Now that spread is $555.

The median monthly home payment rose 56% year-over-year to $2,800.

In order to afford $2800 per month, a household income must be $120,000 per year.

For reference and perspective, the median household income in Phoenix is ​​$60,914 – a significant gap between the annual household income of $120,000 required to buy an average home.

When it comes to rent, the median monthly rent payment is $2,250, meaning household income only must be $96,000 a year – yuck!

Although seasonality may be a root cause, there are many more rentals available on the market this year.

My advice to tenants: If you don’t plan to buy for a while and you don’t think there will be some crazy catastrophic event that will drastically reduce rental prices, sign the longest lease possible.

Price reductions & supply

Due to the high demand during the pandemic, we have many sellers who want the moon and stars.

The good news (for buyers anyway) is that sellers are starting to get a good dose of reality.

The number of price reductions is increase to 2019 levels in some cities.

Homes that are now “starter homes” in the $400,000 to $500,000 range do not experience the drastic price reductions we see with larger homes, however, in some markets (like Phoenix) they had a 71% increase in price reductions in 3 weeks.

I know for sure that Austin is going through a similar experience; Here’s what my Zillow inbox looks like for the homes I monitor:

Photo credit: author, Canva

Price drop, after price drop, after price drop. A year ago I wasn’t getting emails like this.

Will the market continue to fall and is it a good time to buy a house?

Again, we cannot predict the future.

Some cities have their own market index to measure the balance of supply and demand in the residential market, but this only measures “where the market is right now”, not where it is heading next. coming.

In Phoenix they use the Cromford Market Indexand it has continued to decline over the past few weeks – and rapidly.

For reference, a score of 100 = balanced, and prices increase at the rate of inflation.

Today (May 31) the stock index is at 275.5, which means we’re still in a strong seller’s market, but it’s weakening fast.

Once again we are seeing the same scenario in cities like Austin, Dallas, etc. – it’s a strong seller’s market, but it continues to weaken each week.

That said, should you buy a house right now?

If you plan to keep the home for the long term, have the down payment and a healthy emergency fund, and understand the costs associated with home ownership (including the cost of opportunity not to invest the money elsewhere) – of course, go ahead and buy a home.

The decision to buy a house (in my opinion) should be based on your own circumstances, not on what’s happening in the market or if you *think* there will be another crash like 2008.

This time around we have completely different lending practices, so I don’t expect the slowdown in demand to cause a full-blown crisis.

If you plan to buy a house and keep it for 20 years (you can still use it as a rental), why does it matter what someone is willing to pay for that house today?

It shouldn’t matter. Do what’s best for you and your family and ignore the noise.