What's happening in the US housing market?
The housing market is red-hot. Home prices continue to climb, and the national median listing price climbed to $447,000 in May 2022. This leaves many people wondering: are we entering a housing bubble? Will the market crash or at least deflate anytime soon?
With many cobuy groups looking to buy a property to take advantage of the post-pandemic travel boom, Nestment interviewed Joshua Sun of the Joshua Sun Mortgage Team, powered by Blue Financial Group, for his take on the US housing market.
Nestment: What has caused these record home price increases?
Joshua: Home prices have increased primarily because we have a shortage of 5 million homes. Since 2012, an additional 12.3 million households have formed, yet only 7 million new homes have been built in that same timeframe. Household formation is the number one reason people look to buy homes. They get married and most want to have children, so they need more space.
The number of potential homebuyers is massive, with Americans who are either Millennial-aged or younger making up half of the U.S. population. This is significant because, according to the National Association of Realtors (NAR), first-time homebuyers represent the largest share of people purchasing homes at 31%.
Nestment: With this continued demand for housing, do you think we can expect any price relief?
Joshua: Many of the industry’s leading experts are still bullish on the housing market. The NAR recently said home prices appear in no danger of any meaningful decline due to the ongoing housing shortage. Additionally, Sam Khater, Freddie Mac’s Chief Economist, said, “…we do expect some moderation in housing demand, causing house price growth to temper. However, the combination of many entry-level homebuyers… should keep the housing market competitive.”
In short, I expect appreciation to slow down but prices likely will not drop. The 20%-plus jump in median home prices year over year is not expected to continue, which is a good thing because it is unsustainable, but most experts anticipate appreciation will moderate to around 5% per year.
Nestment: Why is there such a shortage in new housing being built?
Joshua: In April 2022, Freddie Mac indicated there is a shortage of 3.8 million homes. New homes have been underbuilt for 10 years. After the crash in 2008-2010, many builders have been hesitant to build because of huge losses during that time.
Additionally, it is taking much longer to build new houses right now due to supply chain issues and construction costs being at 50-year highs. Everything is taking longer and costing more, from drywall to lumber to windows to steel and more. A home used to take about 6 months to build but now it is taking 9-12 months.
Nestment: One more question on new home construction. Why are we seeing so few entry-level priced or affordable new homes being built?
Joshua: A recent study by the National Association of Home Builders (NAHB) found that regulations imposed by all levels of government on new homes account for about $94,000 of the home price. With such steep costs of doing business, many builders have no choice but to build expensive and higher-end homes to be profitable.
Nestment: Let’s talk about renting. How does renting impact the housing market, and what’s happening in the rental market, generally?
Joshua: Rental vacancy is down 38% since 2008. The vacancy rate, or the percentage of the rental inventory that is vacant for rent, currently stands at about 5.8%. The average rents in the top 10 metros in the US were up at least 29% year over year.
What does all this mean for people looking to buy homes? With low vacancy rates, property owners are less likely to sell their properties. Thus, we cannot expect inventory to come from property owners selling.
Meanwhile, with the steep rent increases, it makes it more attractive to buy. If someone is paying $3,000 a month to rent and they can own their own home by paying a $4,000/month mortgage, they would rather do that to gain all the benefits of owning, like more space, a yard, and so on. Thus, more current renters will likely look to enter the housing market, creating further demand yet short supply.
Nestment: What about foreclosures? Many people think a glut of foreclosures may hit the market with these steep price increases. Your thoughts?
Joshua: When COVID-19 hit, 5 million homes went into forbearance but of the 3.5M who have exited so far, only 0.65% resulted in short sales. If we apply this to the less than 1.5M people in forbearance, it comes out to $2,400 homes that may come onto the market because of foreclosures. Such a small amount of homes came onto the market, which didn’t help solve the inventory issue.
Currently, the foreclosure rate is at 0.02% or 1 in 750 homes. It is unlikely we’ll see a lot of foreclosures since one-third of homes do not have a mortgage and a lot of people have equity.
Nestment: How will increased mortgage rates impact the housing market?
Joshua: We’ve seen mortgage rates increase from 2 or 3% to above 5% (as of June 2022) for a 30-year fixed mortgage. When we look at history, interest rates typically decrease about 1.5% in recessions, as inflation is the number one reason why rates go up or down.
The Case-Shiller National House Price Index, the industry gold standard, has tracked every recession since the 1960s. During those recessions, house prices continued to go up but as interest rates dropped, it created more demand as people’s money could stretch a bit further (due to lower interest rates).
Nestment: To sum all of this up, should we expect a major bubble to burst in the US housing market?
Joshua: Like everyone, of course, I wish I had a magic ball and could see the future. But all signs point to no. We shouldn’t expect a major bubble to burst. Prices will level out a bit – from the unsustainable 20%-plus year over year increases – but there is such demand and a housing shortage to expect something like 2008 again.
Whether you're buying, selling, refinancing, or building your dream home, you have a lot riding on your loan specialist. Since market conditions and mortgage programs change frequently, you need to work with a top professional who can give you quick and accurate financial advice. Joshua Sun Mortgage Team, powered by Blue Financial Group, has the knowledge and expertise to navigate the many financing options available. Learn more at teampraise.floify.com, or follow Joshua on Facebook or Instagram to receive helpful mortgage information.
Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market. While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.
