The housing data from April and May is rolling in and it tells us the housing market is slowing at an unprecedented rate. The housing market saw a 20.6% year-over-year jump in US home prices between March 2021 and 2022 and the data is showing this acceleration is about done. Although we might not see immediate results, all signs point to a slowdown in the rate of home price growth, being dubbed the “Great Deceleration.”
The driving force behind this is of course the Federal Reserve. Over the past six months, the average 30-year fixed rate has gone from 3.11% to 5.09% as the Fed got aggressive trying to fight inflation. This has priced out would-be buyers as well as slowed down loan qualification due to higher debt-to-income ratios because our higher rates and higher loan amounts
The biggest cooling indication is inventory. The pandemic’s housing boom saw inventory fall to forty year lows. As mortgage rates went above and beyond 5%, nationwide inventory rose 10%. Again, this is nationwide. Unfortunately in markets like South Florida and NYC, it might be a long time before we see inventory come back to “normal.” “For me, the best part of the housing story in 2022 is the rise of inventory, as this will put home sellers and builders in check. They had too much pricing power and they pushed prices way too high,” says Logan Mohtashami, lead analyst at HousingWire. In Mohtashami’s mind, higher mortgage rates were the only way to fight our “savagely unhealthy” housing market. The logic behind it is this: As home shoppers delay their purchase due to higher rates, it gives inventory the breathing room it needs to rise. The fall in demand will in turn drive housing prices down as there are less and less offers.
Inventory finally started to rise in late March. This began to pick up steam through April as 83% of the nation’s 400 largest housing markets saw inventory levels rise over the most recent six-week window. The largest jumps, as much as 50% in some cases, were towns in Idaho, Oregon, Arizona and New Hampshire. Do not get too excited just yet. Even though inventory levels are rising, they are still much below pre-pandemic levels. Even if the “Great Deceleration” picks up steam, it will take a while before we are at pre-pandemic levels. “The housing market is still savagely unhealthy because of total inventory levels in America,” Mohtashami says. In order for us to return to “normal” inventory levels, he says that we need another 1.52 million to 1.93 million units. Our latest inventory is at 1.03 million units. He is worried that mortgage rates will begin to fall again and we will lose all of our momentum. “While I am very encouraged that inventory is rising on a year-over-year basis, we need it to stick and head a lot higher. My concern in the future is if the rates fall again, some of the inventory gains we had will go away,” Mohtashami says. I know higher rates suck! However, we need to look to the long term goal of housing inventory to level out. This will drive down home prices and even if you have a higher rate, your payment will remain around the same as the values drop. Then when values increase, you will have an appreciating asset, not a depreciating one!