The housing market has been tremendously healthy over the past decade. Low mortgage rates promoted steady homebuying in the wake of the Great Recession and ushered in an era of rapid expansion.
Then the pandemic in 2020 spurred a homebuying frenzy. Given the low housing supply and high demand during this period, the housing market's health couldn't have been stronger. But it seems 2022 is ushering in an era of change.
The three charts below give a glimpse into the sector's health and whether investors should be worried about a housing market crash.
Economic pressures are building up
According to a recent report from real estate brokerage site Redfin, June 2022 saw a notable uptick in the number of home sales that fell through: 14.9%, back above pre-pandemic levels.
Image source: Redfin analysis.
Rising mortgage rates are making it challenging for certain homebuyers to qualify for a loan. If a deal is delayed and extends beyond the original lock period (where the buyer is locked into a set mortgage rate), the rate will readjust to the latest level, which could be markedly higher than it was when the buyer entered into the contract.
A one-percentage-point increase in the mortgage rate can equate to a few hundred dollars' difference in the monthly payment, which is clearly enough to cause a growing number of deals to fall through. These failed deals will likely stay elevated and might even increase as long as interest rates continue to rise.
Red-hot growth in home prices is cooling
The median home price has increased 38% since April 2020, or 19% per year. This accelerated price growth can't last forever. An uptick in homes hitting the market -- and now, rising mortgage rates -- have forced a growing number of sellers to reduce their prices.
Image source: Realtor.com.
Realtor.com's June 2022 housing report found that the number of sellers who reduced their price was back to pre-pandemic levels and up 7.3% year over year.
With that being said, it is still a very competitive seller's market. A recent report from Redfin showed that competition was thinning, but 57% of sellers still received multiple offers with an average of 5.3 offers per home for the agents surveyed.
Days on the market, which is how long a home is listed before it goes to sale-pending or closes, were down four days to a record low of 31.5 days on average, which means it's still a very inventory-strapped market that will continue to push home prices up.
In June 2022, the median listed price was up 16.9% at a record $450,000, according to Realtor.com, the highest ever. Price reductions are happening, but it doesn't necessarily mean real estate values are falling.
Prices are stable, but growth is slowing
CoreLogic's recent report using data from Case-Shiller and Moody Analytics forecast a steady decline in the growth of that home-price index over the next year. By January 2023, it's predicted that home price growth will be around the 5% range, much closer to the historic average.
Image source: Core Logic.
Prices, as of now, are not expected to revert across the board or in the same dramatic way they did in the Great Recession. Some markets are more likely to see large reductions than others, though. Overinflated markets that are at risk for dramatic rises in inventory are likely to dip further and faster than others.
If a recession pushes more homeowners into financial distress, we could see an uptick in foreclosures, which could speed up how quickly prices cool.
Overall inventory still remains well below historic levels and indicates that the housing shortage will continue to strain the market. In this case, this is the one healthy indicator for the market today, and it may just be what's preventing a crash.
