Thoughts on Today's Housing Market

Lately, I have been seeing a lot of posts along the lines of “date the rate, marry the house” or “recession doesn’t equal lower home prices” or “rates are still low compared to the historical average”. When you see things like this without any additional context being provided, it should make your ears prick up. 

So I have decided to share some thoughts I have on today’s housing market…

**Disclaimer: Consult your local RE expert. All markets are different. I take a macro approach in this blog and am referring to national housing as a WHOLE. 

30 year avg. mortgage rates have roughly doubled from this time last year. This is an incredibly sharp rise in such a short period of time and is somewhat unprecedented. It’s true that you will most likely have an opportunity to refinance out of a mortgage if you hold onto the loan long enough. HOWEVER, the effect that interest rates have on prices is also important. Housing prices will come down if rates stay at these levels for an extended period of time. The 2’s and 10’s inverted back in April, which basically means that the bond markets expect higher short term rates versus long term rates. In other words, it is a common recession indicator… The bond market is basically saying that the Fed cannot raise rates as much as they have signaled to the market and therefore must cut rates over the backdrop of a longer-time period, i.e. within 10 years according to the bond markets. IT DOES NOT GUARANTEE a recession, but all recessions have come shortly after a 2-year and 10-year yield curve inversion. And typically, recessions require stimulus in the form of a lower Fed funds rate or open-market operations (asset-purchasing programs, like buying bonds or mortgage-backed securities), or the combination of the two. Although historically resilient, RE is not an invincible asset class that always holds out during recessions. RE is by far the largest global asset class in the world, and as a result there is a lot of stimulus that keeps prices from falling too much during recessions.  And for now, the Fed is keen on bringing housing prices down in order to reduce the CPI via the wealth effect. I am not saying things will go one way or another, I am just adding some additional context to the "recessions does not equal lower housing prices" slogan I see all over my news feeds. 

Secondly, EVERYONE has already refinanced. No cash- out refinance demand dropped -92% YoY, while cash-out refinance demand dropped -76% YoY, and overall mortgage demand is at about half of what it was a year ago. This could force rates even higher since a lot of the fixed loans (some taken out at as low as 2.8%) will likely never get refinanced! The spreads on 30 year mortgages versus 10-year treasuries has widened dramatically, which means that lenders are demanding more of a premium as volume falls. This spread COULD increase even more as the Fed does QT and new market participants will demand more yield. Mortgage rates are HIGHLY correlated with the 10-year treasury, so this decoupling is something to keep an eye on and is another potential reason for rates to remain higher for longer than people expect. Bottom line is DON’T bank on just being able to refinance out of a loan a year or two down the line at sub 4% or 5% levels… It might not happen. 

Here is an example to give you an idea of what the numbers look like… The price of a 400k house at a 30 yr fixed 2.8% rate would have to drop to 273k at today’s +6% rate for the payment to remain the same…

Before I talk about inventory, I first want to point out that Chicago is more stable than the national average and has multiple submarkets that operate somewhat independently. A large bulk of the Chicago housing market doesn’t experience the same ups and downs as other parts of the country do, especially when you look back at the past couple of years. Prices in Chicago didn’t go vertical the way prices did in a lot of other areas in the country, so there is likely less room for prices to come down. Chicago’s market has actually held up quite nicely for the month of May as opposed to the national average, especially when you look at the downtown markets. The suburban markets and SFH markets in Chicago will likely be the poorest performers IMO. 

Now inventory (national inventory)… Short inventory is the most convincing argument for the housing bulls. I would put myself in this camp, but the recent numbers are beginning to paint a new picture as we are seeing inventory pick up right as demand slows. In May, national active listings jumped +26% from April, and are now up +8% from a year ago, while this trend continues into June. This is the first YoY increase since 2019. Pending listings are down -12.6% YoY in May. This comes while May new listings jumped +10% from April and +6.3% YoY, while price adjustments are up +74% in May from April and up +69% YoY. Keep in mind rates are now ABOVE 6%, whereas they were closer to 5% throughout May. Data was pulled from Realtor.com. 

We are beginning to see inventory open up. I think a large part of this is the % of people who own second homes. Over the past 2 years, housing prices rose drastically, while rates remained at all-time lows. As a result the % of homeowners with second homes hit an all-time high. Instead of selling one home to buy another, a lot of people just bought second homes in order to ride the housing wave. Additionally, prices of assets went vertical, so very few people were ever forced to actually sell. We may be starting to see some of this inventory get unleashed…

What I am seeing on the investment side… Less deals are penciling out but demand still there. Some of the smart money I see and hear about is on the sidelines... For now. Sellers are still holding out somewhat even though rates have risen, but prices are adjusting accordingly. As interest rates rise, cap rates need to rise as well in order to adjust for the increased costs of carrying debt. Simple as that. Will prices hold out until rates come down again? Possibly. But rates could also remain at elevated levels long enough to convince sellers we have entered a new market, which will result in further price cuts. 

Bottom line… The foundation is there for the market to shift into a buyer’s market and already has in some markets, but it is important to make sure you are buying SMART. Work with people who also understand this AND DON'T BE DRIVEN BY THE NEWS HEADLINES. There is a lot of uncertainty on the sell side, which could create a nice buying opportunity. But there is also uncertainty on the buy-side, as I have outlined above.

Everyone’s situation is different, but we are now in a market where low down payment methods become MORE RISKY and make less sense. As always, if you are purchasing a primary, you should go into buying with the intention to hold for a few years as an alternative to renting. Don’t rush it and don’t OVER PAY. Those days seem to be coming to an end, for now. There will be opportunities out there, but just make sure you stay informed and consult your LOCAL REAL ESTATE PROFESSIONAL as all markets are very different.