This may be the worst time to enter the housing market in more than 15 years, but that does not necessarily make homebuying a poor decision. The benefits of long-term wealth creation through real estate are well documented. And rising rents, including those of apartment units, also raise the opportunity cost of not owning a home.
Buyers are paying record prices for homes. The median home price rose to $407,600 in May, according to the National Association of Realtors — up 14.8% over the year. In fairness, to identify a shift in price trends, we would need to examine month-over-month changes to prices. But monthly median sales prices are not reliable for tracking trends because seasonal factors change the mix of home types sold each month.
The Case Shiller Home Price Index, which tracks repeat sales, might be a better indicator, but it reports home prices for three-month periods and is lagged. The most current reading, for sales that closed between January and March, shows prices growing by 2.6% over the prior three-month period, December through February.
The surge in home prices over the past two years is largely because of robust pandemic-related demand facing depleted for-sale inventory. At the end of May, there were just 1.16 million homes for sale, according to NAR — roughly two-thirds as many as in pre-pandemic years. Inventory levels reached a historic low in February. After applying seasonal adjustments, May’s inventory was only slightly higher.
While homebuyers have been able to tolerate higher prices in the past two years, rising interest rates are now pushing corresponding mortgage payments even further. As a result, housing affordability has fallen to its lowest levels since the Great Recession. In April, NAR’s housing affordability index fell to 109.2, a value last seen in August 2007, when home prices were near their cyclical peak.
And affordability has likely further eroded in recent weeks because mortgage rates have increased. The Mortgage Bankers Association reported that the average 30-year fixed rate rose to 5.65% for the week ending June 10, up from 5.36% during the week ending April 29 and the highest rate since 2008. Rising rates have led to a sharp drop in mortgage applications, a sign that fewer families are entering the housing market.
It’s not much of a surprise, then, to see home sales falling. Sales of existing homes fell by 3.4% in May over April, the fourth month of declines, and are now 8.6% lower than a year ago. This may be spooking homeowners who are trying to market their houses but are now seeing the market turning sour. Reports are emerging of sellers dropping prices, especially in those markets that saw the fastest price appreciation during the pandemic.
Relief for homebuyers could be on the way from new home construction. For-sale inventory of new homes grew to 444,000 units at the end of April, up 40% year over year and the highest level since May 2008, according to the Census Bureau. Still, excess inventory of new homes may be short-lived because builders have started to reconsider new developments. In May, construction starts fell by 14.4% compared to the month before. While starts are still elevated relative to the past 15 years, sharp declines such as this are sometimes triggered by recessions.
The NAHB Housing Market Index, which tracks builder confidence and leads housing starts by approximately six months, also continues to contract. The index fell to 67 in June from a recent peak of 84 in December 2021 and an all-time peak of 90 in November 2020. Builders cited that rising mortgage rates are leading to lower buyer traffic. But builders also noted that material costs have risen significantly as a result of inflation. That could be why actual deliveries of new homes have been slow.
What We’re Watching …
Signs of the economy slowing are seemingly everywhere, which signals that the actions taken by the Federal Reserve to fight inflation are working as desired. One area that we have not seen roll over yet is the labor market, where job growth remains strong and job openings still near historic highs. However, several companies have recently indicated looming job losses, which, if that becomes a larger trend, will be a significant signal of slowing economic growth — and perhaps a recession. Early evidence will come in the weekly report of jobless claims.