Housing Market Cools: Prices Slide in 47 Major Cities
The U.S. housing market is experiencing a significant slowdown, with prices falling in 47 out of the 50 largest cities. This marks the first widespread decline in nearly two decades. Listing prices are now lower than they were at the start of 2024, and online searches for terms like “can’t sell a house” and “help with mortgage” have reached record highs. Sellers are now outnumbering buyers by more than 600,000 nationwide.
Mortgage Rates Climb, Sales Slow Down
Mortgage rates are climbing again, nearing their highest point in three months. This increase is making homes less affordable for potential buyers. As a result, homes are taking longer to sell than at any point in the last decade. Home builders are also feeling the pressure, with 37% of them cutting prices by an average of 6%.
Regional Differences Emerge
While many areas are seeing price drops, not all markets are affected equally. Some cities, like Miami and Austin, are experiencing a significant oversupply of sellers. In Miami, there are 197% more sellers than buyers, and in Austin, the gap is 124%. However, cities like Milwaukee and New York still have more buyers than sellers, helping to keep prices stable or even push them higher.
Affordability Challenges Worsen
Higher interest rates are a major factor in the housing market’s cooling. A 1% increase in mortgage rates can reduce a buyer’s purchasing power by about 10%. For example, a $500,000 home at a 6% interest rate has the same affordability as a $450,000 home at a 7% rate. This means that as rates go up, home prices may need to fall to maintain affordability.
The income needed to afford a median-priced home has also risen sharply. At a 6.25% mortgage rate, buying a median-priced home of $398,000 with a 20% down payment results in a monthly payment of about $1,954, excluding taxes and insurance. To qualify for this loan, a buyer needs an annual income of $106,000, leaving the average American family significantly short. A small increase of just 0.25% in mortgage rates could price an additional 1.4 million potential buyers out of the market.
Inflation and Construction Costs Impact Prices
Rising oil prices, which directly impact gas prices, can indirectly affect the housing market. When oil prices rise, investors often demand higher returns on long-term bonds, which pushes up Treasury yields and, consequently, mortgage rates. Furthermore, higher oil prices increase construction costs. For instance, aluminum prices have jumped 39% in the last year, and steel prices are up 20%. These increased costs are often passed on to buyers, further impacting affordability.
Real Terms Correction: A Slow Normalization
Economists are observing a “real terms correction” in the housing market. This means that when adjusted for inflation, home prices are not actually rising as much as headline numbers might suggest. In some cases, prices have even decreased in real terms. For the first time in years, wage growth (around 3-4%) is starting to outpace home price growth in some areas. This slow normalization, where incomes catch up to prices rather than a sharp price crash, is seen as a healthier way for an overheated market to stabilize.
Market Performance Varies Widely
The performance of the housing market varies significantly by location. While areas like Milwaukee (up 10% year-over-year) and North Dakota (up 6.4%) are seeing price gains, others are experiencing declines. Florida is down 2.73% statewide, Colorado is down 1.5%, and cities like Oakland (down 9.1%), Dallas (down 3.8%), and Austin (down 5.9%) are seeing notable price drops. These declines are often seen in markets that were particularly hot during the pandemic, where increased supply met slowing demand and rising costs.
Condominiums Face Steep Declines
Condominiums are currently facing particularly harsh conditions. Listing for condos are up 83% compared to buyers, driven by soaring homeowners association (HOA) fees and insurance costs, especially in states like Florida. Because condos typically don’t appreciate as quickly as single-family homes, they are often the first to feel the impact of a market downturn.
Price Predictions for the Coming Year
Forecasts for home price appreciation in the coming year are mixed, but most lean towards modest growth or even slight declines when accounting for inflation. Standard and Poor’s reported national home price growth of just 1.3% for the past year, the weakest gain since 2011. Realtor.com data shows the median list price has fallen 2.4% year-over-year for 18 consecutive weeks. Predictions for the rest of the year range from a 1% increase (Redfin) to a 4% gain (National Association of Realtors), while Zillow expects a 0.7% rise and JP Morgan anticipates zero appreciation. After factoring in inflation, most of these predictions suggest negative real returns for housing prices.
Government Proposals to Boost Affordability
Several proposals aim to address housing affordability. One is a $200 billion mortgage buyout program by the government to temporarily lower mortgage rates, though its impact has been minimal and short-lived. Another proposal involves banning institutional investors, but their small share of the market means this would likely have little effect. The idea of “portable mortgages” would allow homeowners to transfer their current low-interest rates to a new home, which could unlock inventory but faces opposition from banks. Building on federal land is also being considered, but significant development is likely years away.
Investor Outlook: Caution and Long-Term Focus
Experts do not anticipate a widespread housing crash, as many sellers have significant equity. However, the era of easy money in real estate is considered over. Buyers are advised to conduct thorough research, carefully consider location and price, and evaluate long-term holding potential. Builders are offering incentives, sometimes up to 14%, which could present opportunities for those with a long-term investment horizon. For those not looking to buy, renting, saving the difference, and investing in index funds is a viable strategy while the market normalizes.
Market Impact: A Normalization After Excess
The current housing market slowdown is seen by many as a return to normalcy after years of rapid price growth and low interest rates. While some markets are clearly cooling, the overall situation is not necessarily a cause for panic. Investors and potential buyers are encouraged to focus on fundamental value, maintain a long-term perspective, and ensure any purchase makes financial sense. Ignoring the hype and focusing on data is key to navigating this evolving market.
Source: WTF Just Happened To The Housing Market?! (YouTube)
