Ep. 72 - The State of the Housing Market: Fact vs Fear

economy finances housing bubble housing market recession Jul 05, 2023
Whatโ€™s Your 1 More Podcast
Ep. 72 - The State of the Housing Market: Fact vs Fear

Recently, there has been many speculations in the media regarding a looming housing bubble. Some experts argue that the housing market is on the brink of collapse, but it's crucial to focus on the fundamentals. 


Higher interest rates, contrary to popular belief, can be advantageous as they often lead to an appreciation in home prices due to decreased competition. Here are some market insights that will steer you in the right direction. 


Unpacking The Real Numbers

A thorough examination of top appreciation reports reveals a more nuanced story. Last year saw a 6% increase in home values by year's end. While the first half of the year, from December 2021 to June 2022, saw a 9% spike, it was slightly offset by a 3% decline in the latter half. 


Despite some indices like Kay Schiller showing a 3% decrease from the peak, most reports point towards an upward trend starting January. Home values not only started to appreciate again but began to accelerate.


Higher Rates and Market Dynamics

Although higher rates were initially perceived as a threat, the bottom line is governed by supply and demand. 


The current inventory shortage, with the existing home inventory at about a million homes for sale, coupled with surging demand, even amidst high rates and home prices, has influenced home value appreciation.


The Impact of New Home Construction

Builders have responded to this demand by constructing more homes, bolstering sales. However, existing home sales have been hampered by low inventory. 


The latest existing home sales report shows an average of 3.1 offers per listing, with 31% of listings selling above the asking price. The average day on the market was 18 days. This demand suggests that we will continue to see home prices appreciate.


The Cost of Waiting to Buy

For potential home buyers, choosing between buying a home today or waiting for rates to drop is critical. Consider a $500,000 home purchase with a 7% interest rate. The difference between buying today and waiting a year for rates to drop 1% could result in losing $25,000 in appreciation to save $1,800 in interest. 


Even after accounting for potential refinance costs, you would still be ahead by over $20,000 by buying today. Further, lower rates could also mean increased competition and likely price inflation due to multiple offers.


Looking to the Future

Moving forward, demographics will play a pivotal role. For instance, the average home buyer is 33 years old, corresponding to the peak of the millennial birth rate in 1990. 


This influx of potential new home buyers combined with low inventory and hibernating buyers could lead to a compounding effect on the housing market.


Bottom Line: A Market Bubble or an Opportunity?

The current scenario starkly contrasts with the housing bubble in the early 2000s, when there was an oversupply of homes, a drop-off in birth rates, and easy access to credit. 


Today, with a quarter of the available inventory and increasing demand, we will likely see the opposite effect. With rates expected to drop in the future, the demand and competition for homes will only increase.


Rather than viewing the current situation as a housing bubble, it can be seen as an opportunity. Based on these analyses, it's reasonable to predict an appreciation of between 5 and 6% nationwide for the full year 2023. 


The weakening economy could potentially lead to a recession. Still, in the context of the housing market, this might translate to certain sectors undergoing recessions at different times, creating an overall 'rolling recession.'