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Housing Market in the US Begins to Show Signs of Distress

Prices are falling from their peak levels, with expensive West Coast markets seeing the steepest declines. Bidding wars are fading, and sellers are having to lower their expectations.

September 22, 2022
12 minutes
minute read

The US housing market has shifted from fear of missing out to just plain fear. This change has been driven by a number of factors, including rising interest rates, concerns about the economy, and tighter lending standards. As a result, many potential buyers are now holding off on purchasing a home, waiting to see how the market will develop over the next few months.

Prices are falling from their peak levels, with expensive West Coast markets seeing the steepest declines. Bidding wars are fading, and sellers are having to lower their expectations.

This could be a great opportunity for buyers who have been waiting to get an edge in the market. However, they are now facing the worst affordability issue in almost four decades.

The end of the pandemic housing boom is leading to a sense of paralysis in the market, with prices expected to decline. Mortgage borrowing costs are at the highest level since 2008, making it difficult for potential buyers to enter the market. Even big Wall Street buyers are holding back, waiting for prices to fall.

Mark Zandi, chief economist for Moody's Analytics, believes that prices will soon start to decline. He believes that until this happens, people will be hesitant to make any big purchases.

The Fed's latest rate hike signals that more increases are on the way, and Chair Jerome Powell has warned of a potential housing correction. Goldman Sachs Group Inc. expects home prices to flatten next year, while Zandi is more bearish, predicting price falls of 5-10% without a recession, or up to 15% in a mild recession. In some of the most overheated markets, values could crash by as much as 25%, he said.

Both buyers and sellers are stuck in place. Listings are lingering longer because demand has collapsed. But less supply is coming into the market, with a report this week from Zillow Group Inc. showing that new listings slid almost 23% in August from a year earlier. That’s because homeowners who don’t have to move don’t want to trade cheap rates for higher ones, keeping inventories relatively low.

Sales of previously owned homes have been falling for the past seven months, reaching the lowest level since the pandemic began in May 2020, according to the National Association of Realtors.

Julie and Edward Soto are stuck in the current housing market. After selling their Rock Hill, South Carolina, house at the end of last year, they moved about 20 minutes away to Fort Mill, their favorite Charlotte, North Carolina, suburb. However, in a market that is now crowded with investors, they have had difficulty finding a new home that is worth looking at.

The competition has cooled down for now, but unless something big comes their way, they're planning to stay in their rental. With the mortgage-rate swing and the prospects for a deteriorating economy, that's not a bad place to be, Julie Soto said. "In these uncertain times, it's important to take your time and make sure you're making the right decision," she said.

According to Black Knight Inc., payments on a median-priced US home now require 36% of household income, the biggest chunk since 1985. This is up from 22% in September 2021, when rates were about half as high as they are today. With the average 30-year, fixed loan now surging to 6.29%, mortgage costs show no sign of easing anytime soon, Freddie Mac said Thursday.

Housing affordability is now at its worst level since 1985, according to a new report.The report, from the National Association of Realtors (NAR), found that median home prices have risen faster than incomes over the past year. This has made it increasingly difficult for people to buy a home, especially first-time buyers.NAR's chief economist, Lawrence Yun, said that the situation was "not sustainable" and that something needed to be done to make housing more affordable. He suggested that the government should provide more funding for affordable housing initiatives.

The data in this article is based on the median income needed to cover payments on a median-priced home bought with a 30-year mortgage and 20% down. The September level is based on the Freddie Mac 30-year rate from last week.

The market is cooling off the most in areas where affordability has become a major issue. California, for example, has seen some of the biggest home-price declines. According to the state Realtors association, only 16% of households could afford to buy a home there at the end of the second quarter.

San Francisco and Los Angeles experienced the biggest drop in prices in August, according to Zillow data. Sacramento, Seattle and Salt Lake City all saw decreases of more than 2.5%. Prices nationwide fell 0.3% from July, the biggest drop in 11 years.

George Ratiu, senior economist with Realtor.com, says that traditionally, September and October are the best months to purchase a home. This is because the buyer rush before the start of the school year is over and at the same time, inventory grows because those who haven’t sold are now competing against new listings. However, Ratiu says that buyer calculations are now being upended. According to Ratiu, buyers in the fall of 2022 will be facing a lot of tension. On the one hand, this is expected to be the best time of year to buy a house from a historical perspective. On the other hand, there is the risk of an impending economic recession, which could cause the housing market to decline.

Homeowners with mortgages who are hesitant to sell in a declining market are limiting the growth in new supply, according to a report from Redfin Corp. This could help to prevent prices from falling too steeply.

In the new-home market, builders who increased production earlier this year are now facing too much inventory. According to Rick Palacios Jr., director of research at John Burns Real Estate Consulting in Irvine, California, almost half of builders said they cut prices in August, up from 8% in May. This is the highest level since at least 2010.

The strength of the housing market depends heavily on geography. East Coast markets, from New York and Boston to Florida, have remained relatively strong. And, for the right price, homes are still selling even in the Sun Belt, where demand has downshifted the most.

In Austin, Texas, where many local buyers have been priced out following a pandemic-fueled boom, home sellers are dropping asking prices 10% or 20% below what they expected as recently as June, said Gabriel Recio, an agent with Redfin. They’re offering concessions to close deals, such as $10,000 gift certificates to Home Depot, he said.This is a buyers' market, and sellers are having to adjust their expectations accordingly. If you're looking to buy a home in Austin, now is a good time to start negotiating. However, there are limits to how low prices will go, because most sellers are not desperate, according to him. Recio noted that many buyers are hoping for a 40-50% return to pre-pandemic levels, but that this is unlikely. "They're dreaming," he said.

Tzahi Arbeli, a local Redfin agent, said that sellers in Las Vegas are helping with closing costs and boosting broker fees. He advised buyers to get the house they want and accept today’s mortgage rates, because there is a chance they can refinance for less in the future. He also warned that rates could go even higher and make a home unaffordable. Arbeli suggested that people marry the house they live in, rather than the mortgage rate.

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