The breakneck rate of home price growth over the past two years is entering a phase Fortune calls the “Great Deceleration.”

Reasons Housing Market Is Shifting

There are three main reasons for the housing market shift, according to Fortune:

  1. The Federal Reserve has done an about-face on fiscal policy by putting a lid on the now 40-year high inflation rate of 8.3%. As the pandemic housing boom spurred home prices to soar +34.4% in two years, the Fed initiated upward pressure on the pandemic’s historically low interest rates in March.  Mortgage interest rates have climbed from 3.11% to 5.49% over five months as a way to de-incentivize incurring debt by making that debt more expensive.  Data on home sales in April and May implies that the Fed’s policy shift to higher interest rates is having a positive effect…home price growth is cooling
  2. In May, Fortune asked Moody’s Analytics to do a proprietary analysis of housing market valuation across the country. Moody’sdetermined that 96% of regional housing markets are “overvalued.”  Translation – “overvalued” means that home prices (+19.8% this last year) are above what local income levels (wage growth increase of +4.8%) can support.  The disparity between housing costs (+19.8% y/y) and income levels (+4.8% y/y) along with now soaring interest rates, is simply too much.
  3. The US economy is losing momentum. Not only did the pandemic disrupt the health of our citizens (and continues to do so), the pandemic disrupted employment patterns via the Great Resignation of 4M workers plus how and where workers work.  With increasing signs of a forthcoming recession, employers may insist that staffers return to on-site offices and, in turn, may affect the remote worker home buying boom.

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Inventory Levels Beginning to Rise

The pandemic housing boom depleted housing supplies nation-wide.  Heading into this year’s spring market, supply levels were down -48% below pre-pandemic levels.  Having few housing options, homebuyers bid up home prices like never before.

The good news for the fewer buyers who can still afford to buy during the Fed’s shift to higher interest rates is that inventory levels are slowly inching upwards.

But Ali Wolf, chief economist at Zonda, cautions against being overly exuberant about cooling demand and climbing inventory.  Wolf told Fortune, “While demand has softened, there are still more buyers than sellers given the acute lack of inventory…(and)…there will (still) be upward pressure on prices.”  Just not as much upward pressure on prices.

Home Sales Falling

This last week the US Census Bureau reported that new home sales dropped -17% between March and April.  Likewise, the Mortgage Bankers Association reported that new mortgage purchase applications declined for eight of nine weeks over the past three months.

Redfin reported that the share of homes with price reductions had increased to an average of 10% nation-wide last week plus the share of homes getting multiple offers via bidding wars was also decreasing.

According to Devyn Bachman, vice president of research at John Burns Real Estate Consulting, “The dramatic increase in the average monthly mortgage payment has priced some buyers out of the market and caused others to get cold feet.  Discretionary buyers do not want to buy when they feel like they are purchasing at the peak of the cycle.  Price reductions are happening and will likely continue as demand and supply begin to recalibrate.”  Additionally, Backman said, “…in some cases, buyers have stopped searching for a home altogether.”

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Thanks to Fortune.

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