As a Realtor, I get asked this question – and its cousins – all the time: is the housing market going to collapse like it did in 2008? Can prices keep going up? Are prices going to come back down? Is this a bubble? Obviously, I don’t have a crystal ball, but I don’t think we’ll see a crash. And I don’t even think we’ll see a decrease in pricing overall. I like to think that prices will level out and grow more slowly, but that might not happen either.
Homes in Most U.S. Metro Areas Are Overpriced
In a May 12, 2022 NPR article Housing Prices Could Fall in Some U.S. Cities Moody’s Analytics confirms with data what we already know from experience: “homes in most U.S. metro areas are more expensive than they should be right now.” That includes Kentucky. Even though we are not as overpriced as Boise City, Idaho (Idaho!) at 73%, areas of Kentucky are still overpriced:
- Clarksville Area Near Nashville 48%
- Bowling Green 29%
- Elizabethtown-Fort Knox 28%
- Lexington/Fayette County 25%
- Owensboro 20%
- Cincinnati OH/Northern Kentucky/Southern Indiana 16%
- Louisville/Jefferson County 14%
Mark Moody, Chief Economist for Moody’s Analytics, says he does not expect a collapse in housing prices because because of two market forces – lack of supply and a change in lending regulations.
Lack of Housing Supply
LBAR Realtors who represent buyers know all about the lack of supply. For the past couple of years, we’ve been trying to help our clients navigate a changing landscape of:
- Multiple offers (sometimes 20+), escalation clauses
- Offers that go way over asking price with appraisal gaps that lower-down-payment borrowers cannot afford
- Waiving due diligence like inspections
- Cash pushing lower-down-payment loans (like VA, FHA, USDA) and even 20% down conventional loans out of the competition (in part because the appraisal can be waived)
- People cashing out their 401(k)s so they can compete as “cash buyers”
- Parents using their retirement funds to pay cash for houses for their kids so they can compete as “cash buyers”
- Investors with cash scooping up the first tier of housing that used to be available for first-time or low- to moderate-income buyers.
It feels crazy. It is crazy. After losing offer after offer, many buyers have just stopped looking (one Realtor colleague wrote over 70 offers for one buyer before that buyer just gave up). Some buyers dropped out of the market back when interest rates were much lower, hoping prices would come down.
Prices have not come down. They have gone up. A lot.
And now interest rates have gone up. A lot.
Rising Mortgage Interest Rates
The average 30-year mortgage interest rate has risen dramatically, much more than we were told to expect. After going as low as 2.5% in October and November, the 30-year rate was 2.94% in May 2021. As of May 12, 2022, it is 5.3.
We had been told to expect interest rates to rise by the end of 2022. However, we did not expect them to rise so far so fast. According to Jeff Ostrowski in an article on Bankrate.com, the average rate on 30-year mortgages had reached 5.46%, the highest rate in 13 years. A year ago, it was 2.94%. A month ago, it was 5.12%.
What’s the big deal, you might ask. We’re still at historic lows. But the difference in interest rates has significantly reduced the buying power of the borrower at a time when housing prices continue to rise. We refinanced our VA loan is at 2.25%; we’d be paying 5.25% if we needed to lock in a mortgage rate today. On a $200,000 loan amount (not including any MIP), the monthly principal and interest (P+I) payment at 2.25% loan is $765 versus $1,104 at 5.25%, a difference of $339 or a staggering 44%. (On a $400,000 loan, the P+I is $1,529 at 2.25% versus $2,209 at 5.25%, a difference of $680.) When that amount is calculated into the debt to income ratios, buyers find themselves with far less buying power at a time when prices are continuing to rise not fall.
Wait, you might ask, aren’t higher mortgage rates supposed to correlate with lower home prices? Isn’t it supposed to balance out?
Well, Home Prices Are Not Falling in Response to Higher Interest Rates, At Least Not Yet
According to Redfin, “while 15 percent of home sellers dropped their asking prices during the four weeks that ended May 1, 2022, 56 percent of homes sold for above listing prices in that period, a record high” Meanwhile, inventory is still well down and prices are up.
Part of the supply problem stems from the 2008 collapse, when many homebuilders went out of business. Freddie Mac estimates that we are short 4 million homes we’d need to satisfy demand, and it will take time for that to level out. Another problem is that home owners are not leaving their current homes because they don’t have confidence they’ll be able to secure the next house.
Will Mortgage Industry Changes Post-2008 Protect the Real Estate Market From Another Collapse?
After the housing crash in 2008, the federal government issued new rules to protect consumers from predatory lenders and from themselves. The NPR article says these regulations mean that homebuyers can afford their loans because they have to “document their income and ability to repay the loans.”
However, as pressure on buyers (low inventory and less buying power because of higher 30-year interest rates) and pressures on lenders (competition for fewer people who can afford higher interest loans and drop in revenue from refinances as a result of higher interest rates), conditions could be right for a return to riskier loans.
So What’s Going to Happen?
Honestly, there’s no way to know for sure what’s going to happen. Economists are split. Most predict a leveling out or a slower increase in prices rather than any real drop. Some experts think mortgage rates will plateau (but they also said mortgage rates would go up half a percent). As I said, I’m hopeful that mortgage interest rates will stay where they are or drop, and I’m hopeful that housing prices will stabilize so that they are sustainable. We’ll see.
Sources
Home Prices Could Fall in Some Cities, NPR
Susan Doyle and Michele Lerner, Mortgage Rates Edge Up, Washington Post
Jeff Ostrowski, Mortgage Rates Reach 13-Year High, Bankrate.com