Washington, Aug. 4, 2022
The Kiplinger Letter
After two years of sizzling price increases…
The housing market is starting to cool off.
Another housing bust is not in the cards.
But big changes are afoot in coming months.
You can already see the shift in the market.
Prices are still way up. But they’re flattening
after the steep ascent that began amid the pandemic.
The days of 20% annual price increases have ended.
This year, price gains will steadily shrink.
Next year, prices are poised to actually fall.
It won’t be a crash. More like a correction,
with nationwide prices down 1% or so. Some sellers
who bought recently, near the peak of the market,
will get burned. But overall, a price pullback will help
to get the market into better balance. It’s been so tight
that home buyer sentiment hit a record low in June.
The signs of a slowdown are multiplying:
Listings are up. Buyer traffic is down a lot.
Inventories are up relative to demand.
Sellers are lowering their asking prices.
Expect all of those trends to continue.
Higher mortgage rates are the main reason for the end of the housing boom,
not surprisingly. After averaging 2.8% at the start of 2022, the rate on a 30-year loan
shot up to 5.8% by June. Rates have since pulled back a bit, but are unlikely to drop
below 5% this year, keeping a lid on how much buyers are willing or able to spend.
As a result, sales have slumped. New-home sales dropped 8% in June.
Existing-home sales…down 5.4%, marking the fifth consecutive month of decline.
Therefore, inventories are on the rise…the supply of new homes for sale in June
was the highest since 2008. Sales of existing homes are down 14% from a year ago.
Expect builders to pull back due to these sales declines. Home builders
were already facing supply constraints that slowed completions and ate into profits.
Now, with buyers disappearing from the market, they will hesitate to start new jobs.
Instead, they’ll focus on working down the huge backlog of houses under construction.
The prospect of price declines may raise fears of another housing meltdown.
But the overall market looks healthier than it did when the last bubble burst,
about 15 years ago. Banks have become far more cautious in their lending standards,
as have other financial institutions that lend to home buyers. There’s little market
for securitized mortgage bonds outside of what Fannie Mae and Freddie Mac back.
And they require much higher credit quality than what was typical 15 years ago.
We’re not going back to the days of zero-down loans to buyers with dodgy credit.
Still, some local markets are likely to suffer after enjoying sharp run-ups
in home prices. Many of those are in Fla., where prices were recently rising by 30%-40%
a year in some areas. Now, with mortgage rates up, contract cancellations are spiking.
After two years of sizzling price increases…
