I’ve been hearing a lot of buzz lately about warning signs in the heretofore-hot housing market – and with it, implicit worries that such a downturn could become a runaway collapse. But while a drop in housing prices is definitely plausible, attempts to forecast that are problematic… and I see very little reason to use sensational “boom and bust” terminology at this juncture.
The clouds and the silver lining
As I’ve said before, a quick rise in prices does not a bubble make. Conversely, a slowdown in the market doesn’t portend a crash. But let’s look at some of the “warning signs” that get cited as evidence of an imminent housing bust, as well as the bigger picture around them.
WARNING SIGN: Home sales have fallen 5.9% from this time last year
BIG PICTURE: This is true! The number of existing-home sales has fallen for 3 consecutive months now. However, don’t forget our starting position. Yes, sales are down… but from an all-time record, and still above the 10-year average. Boohoo.
BIG PICTURE: Obviously, increased supply could lead to a surplus down the road… but this increase is sorely needed right now. Housing supply has been way, way too low for a long time, falling well behind the rate of population growth. So an increase in inventory is actually a good thing at present, and will even help to temper inflation.
BIG PICTURE: This one is just plain silly. It makes it sound like homes are getting cheaper across the board, which is definitely NOT the case. In fact, the median sales price for existing homes right now – $397,600 – is the highest ever recorded. That’s up a whopping 14.8% from this time last year.
But sure… if some of those hot markets had previously seen spikes of 20% or more, then I guess you could call this a decline. Again, boohoo.
Why housing prices may fall
Although I see more reasons for home prices to be elevated overall, I admit there are two possible causes for future price drops:
- Higher mortgage rates. Since ultra-low or nonexistent mortgage rates were a major cause of the housing boom, the recent rate hike could have a correspondingly inverse effect. But historically, rising interest rates haven’t had an outsized effect on home sales.
- Supply bottlenecks ease up. Data suggests that although new home construction has remained constant, those builds may be going unfinished due to continued supply issues with building materials. As noted above, we could face a supply glut once those issues are resolved.
These two variables, however, have yet to significantly affect prices.
So in sum, we can conclusively say that the home market is not currently showing many signs of peril. Not yet, at least; much of this news sounds worse than it really is.
Remember, artificially low interest rates have pulled homebuying demand forward. The last two years have been unusually prolific for the housing market, and what we are seeing now is not so much a reversal of demand as a reversion back to normalcy.