Despite the lowest affordability levels since the 1980s, the chances for a housing crash currently remain low. Here are some factors to watch. Several current factors could potentially contribute to warming up this slow-moving market.
Key Takeaways
- Household Growth and Demand:
- The growth in households, including rebounding immigration levels, continues to add to the pent-up demand for housing, which is estimated to run into the millions.
- Supply Constraints:
- Due largely to the lock-in effect of low mortgage rates for existing homeowners, the supply of homes for sale remains far below supply-demand equilibrium, pushing upward pressure on sales prices.
- Rental Market Dynamics:
- With rental vacancies slightly above supply-demand equilibrium, new tenants signing leases in oversupplied markets may be able to negotiate move-in specials including periods of free rent.
Current Market Observations
The housing market continues to defy gravity and set record-high sales prices. In the past, rising mortgage rates would lead to a decline in home prices to maintain affordability. Today, however, with many existing homeowners locked into low mortgage rates of 4% to 5% or below, there have not been sufficient incentives to move elsewhere, keeping home inventory low and prices high – for now.
Factors Potentially Thawing the Market
Several factors may conspire to start thawing out this semi-frozen market, including:
- Rising maintenance costs due to climate change.
- Steeper property taxes tracking higher housing values.
- Aging baby boomers unable to maintain large, multistory suburban homes.
- Growing families outgrowing their existing space.
- Usual forced sales from death, divorce, and debt.
With the national median home sales price heading toward the mid-$400,000 range and under 2.5 months of for-sale inventory in April and May tracked by Redfin, now may be an opportune time to sell for those needing to make a move.
Home Maintenance Costs Soaring
Beyond higher mortgage rates and payments, maintenance costs for a typical single-family home – including repairs, property taxes, insurance, and utilities – rose by nearly 26% between March 2020 and March 2024 to over $18,000 per year. While the median sales price rose by 40.1% during the same period, these rising variable costs contribute to homeownership becoming increasingly unaffordable. As a result, renting remains much more affordable than owning.
Defining a Housing Market Crash
A housing market crash is typically defined by a rapid decline in values leading to a peak-to-trough fall of 20% or more. In the aftermath of the 2007-08 financial crisis, rising foreclosures and the lack of demand fed into each other, exacerbating the collapse in prices.
Institutional Investors’ Role
Institutional investors purchasing single-family homes in recent years have driven up home prices. However, their entry into the single-family rental market in 2012 helped stabilize the housing market and give birth to a new asset class: single-family built-for-rent homes.
Lock-in Mortgage Effect and Demand
The combination of the lock-in mortgage effect, more millennials entering their peak earning years, and population growth adds to the pent-up demand for housing. Estimates of this shortfall range widely from 1.5 million to 7 million units. As long as demand exceeds supply to this extent, a national housing crash is unlikely without a surge in job losses, a sudden decline in consumer sentiment, or a sharp rise in delinquencies and foreclosures.
Housing Market Index
The U.S. News Housing Market Index (HMI) tracks a wide array of data points to provide a simple yet comprehensive way to review the health of the national housing market and over 50 metropolitan statistical areas (MSAs). For April 2024, although the U.S. HMI slipped 0.3 points from March to 63.8, it rose 5.5 points year-over-year due to a spike in the Demand HMI index.
Future Supply
New permits for single-family homes totaled nearly 93,600 in April, up 22.5% year-over-year as homebuilders take advantage of the low supply of existing homes for sale. Single-family built-for-rent homes are being built more, especially in the South and Sunbelt markets, making renting more attractive due to low affordability levels for purchasing single-family homes.
Conclusion
At the moment, with the U.S. economy among the strongest in the world and home prices pushing up to record highs due to scarce supply, there are no signs of a housing crash anytime soon. However, geopolitical events or a deep recession accompanied by rising foreclosures could lead to a decline in home prices.
Although the semi-frozen housing market remains unhealthy due to scarce supply and challenging affordability levels, it will likely thaw out more only with the combination of more homes for sale and lower mortgage rates.
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