Is the US housing market headed for a price correction?

US home prices rose 18.8 percent in 2021, according to the S&P CoreLogic Case-Shiller National US Home Price Index. During the first three months of 2022, house prices continued their upward trajectory. According to the National Association of Realtors (NAR), the “median price of existing homes for all home types in March was $375,300, up 15.0% from March 2021 ($326 300), as prices increased in each region. This marks 121 consecutive months of year-over-year increases, the longest streak on record.”

Despite rising home prices, there are growing concerns regarding the overall health of the US housing market as the pace of sales has cooled in recent months due to rapidly rising rates mortgages and the continuing shortage of supply. A recent analysis by Redfin suggests that at least some homebuyers have been left out. But the same analysis suggested that about 54 percent of homes still sold for above their list price.

Given the outsized role that the housing sector plays in the US economy, it is worth considering whether we are approaching a turning point in the housing market. Indications that the Federal Reserve has finally realized that it needs to anticipate rate hikes to reduce rising inflationary pressures have caused the bond market to readjust interest rate expectations. Consequently, the 30-year mortgage rate recently topped the 5 percent level (average mortgage rates increased 2 percent from December 2021).

While rising mortgage rates weigh on buyers’ ability to raise home prices in the future, it remains unclear whether an actual correction or sustained decline in median sales price is likely this year. anus. On the demand front, several favorable structural factors are still in play. First, millennials are reaching the sweet spot for becoming first-time homebuyers. According to a recent NAR report, “The combined share of younger millennial (ages 23-31) and older millennial (ages 32-41) shoppers increased to 43% in 2021, up from 37% the previous year.”

Second, the shift of some white-collar workers from first-tier to second-tier cities has generated substantial new and continuing demand for housing in urban and suburban regions experiencing rapid population growth. Shawn Tully of Fortune magazine notes, “The home office economy has freed families to leave high-cost subways on the coasts and flock to super-affordable sunbelt cities, which It has boosted their markets tremendously.”

A third factor has to do with the price-rental ratio. While the dramatic increase in rents in fast-growing metropolitan areas (Boise, Phoenix, Austin, etc.) may be cause for concern, the surprising rise in rents across the country in recent months may act as a push factor for prospective home buyers. .

Essentially, expectations of continued rapid rent increases may force some to consider becoming homeowners with a fixed and predictable monthly mortgage payment. The fact that real estate can act as a hedge against inflation is an added bonus.

Finally, the emergence of deep-pocketed corporate buyers and investors has been a factor sustaining demand, especially in sunbelt cities. Private investors compete with and often outperform first-time home buyers.

On the supply front, home inventories remain low. The fact that new home construction (especially single-family homes) was muted for a decade after the 2007-08 crash has left the US with a substantial supply deficit. High material costs and supply bottlenecks have further prevented homebuilders from ramping up new construction and delayed bringing new units to market.

Additionally, many existing homeowners are unwilling or unable to put their homes on the market. Many of those who have locked in historically low mortgage rates in recent years are unwilling to risk entering a red-hot housing market where they may not only have to pay a high price to find a new home, but they also risk a potentially much higher mortgage. Velocity. An insufficient inventory of new and existing homes is likely to keep prices elevated in the short term.

While a housing market correction is unlikely in 2022, the real estate sector faces several serious headwinds. The growing problems associated with housing affordability pose a growing threat. In many parts of the country, especially in metropolitan regions that have seen substantial increases in both rent and house prices, the share of households’ monthly budgets devoted to housing-related expenses has far exceeded ideal or sustainable levels. (Typically spending about 30 percent of monthly income on rent or mortgage [and HOA] payments is considered ideal.)

Currently, tight labor markets and strong household balance sheets offer enough drag to sustain real estate demand despite high home prices. As the Federal Reserve belatedly turns aggressive and implements aggressive rate hikes to fight inflation, there is a definite risk of an economic hard landing in 2023. Once higher interest rates cool the economy enough to to cause unemployment rates to rise, many more households will find it difficult to meet their housing-related expenses.

A recent study by the Dallas Federal Reserve offered the following warning: “Our evidence points to abnormal behavior in the US housing market for the first time since the boom of the early 2000s. The reasons for concern are clear. on certain economic indicators, the price-to-rent ratio, in particular, and the price-to-income ratio, which are showing signs that house prices in 2021 appear to be increasingly out of step with fundamentals.”

The only mitigating factor is that the financial sector has not lowered borrowing standards this time, and that potentially reduces the risk of a broader hit to the real economy when the housing market eventually cools.

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.

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