After several years of rising prices, followed by more rising prices, the housing market has started to sour, and at a remarkably quick pace. In just three months, the housing financial environment has gone from boom to something more like a boomlet. How do we know this? It seems that construction activity has slowed. That’s always the canary in the coal mine, but there is more. Home prices have slipped, as well. Like most market observers, Money Examiners was caught by surprise. We decided to find out more. Here is what we know so far.
While we were all caught by surprise in a way, perhaps we shouldn’t have been. In fact, in some ways, the weakness in the housing market should have been a bit of an expectation. Steep and regular price increases along with booming mortgage rates were bound to affect affordability. The surprise is in how quickly the landscape shifted. The speed of the shift indicates the market will not reverse any time soon.
How low can it go? Real estate leader Redfin tells us that the national housing market is almost four percent lighter than it was one year ago. The National Association of Realtors reports similar numbers. That is a portentous number for us all, but a certain segment of the population is particularly interested in what this development means for them.
In other words, should prospective homebuyers forego or delay their planned purchase in anticipation of prices falling in a big way? Perhaps not. As supply falls during the downturn in demand, experts see very little reason for prices to fall too far. Also, the Fed’s commitment to continued increases in the prime interest rate points observers to anticipate an erosion in affordability that we are already seeing take place. So, if anything, expect a further drop in demand, followed by a decrease in supply, and so are the days of our lives. While it looks like the economy will need strength in areas other than housing, the homebuyer and renter cannot expect immediate relief, except for a slowing of housing price increases.
There is a silver lining in this bad news-no news development. Unlike in the Great Housing Crash of 2008-2009 people are backing away from new home purchases in response to the high prices we have experienced for so long. In the run-up to that crisis, people bought and bought and bought some more. Who could blame them? Every financial advisor in the world was hawking zero down loans that would magically become retirement savings in a market that would grow to Mt. Everest heights. Today’s response to high price and low affordability heralds a less dangerous attitude.
So, even as consumers are behaving themselves, Money Examiners wonders, along with you, what the end-game is going to be. The coming collision of bulls and bears means financial volatility. Will that roller coaster include housing prices? We will be there to tell you about it if it does. Until then, watch this space.