Last Updated on July 6, 2022 by Luke Feldbrugge
Welcome to the Housing Market Trends monthly update for July 2022 from Homes for Heroes. This report focuses on the residential real estate housing market. We listen to the experts and boil down what they have to say to assist you, our heroes, with decision making regarding buying a home, selling your home, or refinancing your mortgage.
If the real estate market was a calm, contemplative, peaceful environment where things changed little and rational minds dominated the discussions, you wouldn’t need these monthly reports. As it stands, however, the real estate market is volatile, so keeping up with the changes, especially if you are buying or selling a home, is critical. Total strangers will walk up to you, telling you that it’s crazy to be thinking about buying a house with the current interest rates.
Newspaper headlines aren’t any better than unhinged strangers. They love to put words like “high interest rates”, “increasing inflation”, and “recession” in large bold type. This is a good time to take a measured, rational report based on real economic statistics and housing market predictions. It may be the only way to keep your sanity…and stay focused on the goal of buying or selling a home (or refinancing your mortgage).
Interest Rates: Are They the Whole Story?
In a word: yes. Right now the rise in interest rates in recent months, and higher mortgage rates, in the first half of 2022 is the big real estate trend, especially if you are entering the market to buy a house. Wise old economists will try to remind you that, traditionally, a mortgage interest rate in the low-to-mid 5% range is still quite low. They will show you a chart of interest rates that stretches back to the 1970s to show you that this is a slight increase and you are overreacting.
Great, thanks.
Some of us, however, haven’t been around since the 1970s and are just entering the housing market for the first time. For us, the past decade’s low mortgage rates are what we are used to, and they have been quite low–lower than 5% anyway. So new home buyers and first home buyers are seeing interest rates at an all time high for a typical home–the highest level in a decade. Let’s acknowledge that.
Enough history – what’s happening now? Interest rates seem to have leveled off and are no longer increasing at their record pace. The economic term is that they are plateauing, and depending on which experts you listen to, that’s where they are staying in the 5% range for the remainder of 2022.
It’s now up to you on how to react to interest rates that are plateauing. Does that take the sting and fear out of the escalation of the last 6 months and make you ready to start looking at houses again? Maybe the reduction in volatility is enough to be somewhat encouraging so that prospective buyers can slowly, carefully dip your toe in the real estate pond again?
Or maybe it’s all still a little too crazy and you’re going to wait and see what happens?
It’s your money and your future: you get to decide. In our opinion, having perspective and understanding the long game that is real estate will help you make the best decision.
Does Inflation Equal Recession?
In second place in the economic indicators beauty pageant is inflation. The hand-ringers will say the return of inflation (after a long hiatus) means the advent of a recession. That may be true if other factors push us in that direction, but there are two ways that inflation affects the real estate world if for first time buyers.
It eats away at the value of your current money and income. During high inflation, your dollars buy less and are consequently worth less. If inflation weighs in at 9 percent for 2022, your paycheck has been cut by that amount and the value of your savings has been reduced by a similar amount. Gulp.
It can increase housing prices, which in normal times, would be concerning. However, current house prices are outstripping the inflation rate, so it shouldn’t have much effect during your house hunt. If you’ve been out there shopping for new homes, you already know how tough the pricing is out there.
The larger question is: Should you buy a home during a recession? One of our blogs tackled that question a week ago.
If You’re a Seller: Is This a Correction?
Certain economic experts are also throwing around the term “housing correction.” That’s a scary term because the last “correction” was in 2008/2009 when the bottom absolutely fell out of the real estate world. People remember that one. People remember the underwater mortgages, the foreclosures and the worldwide financial recession that resulted. They were dark times that no one wants to revisit.
Technically, an economic correction means a decline of 10% or greater in a financial market, a security or an asset. Right now, experts are forecasting an almost 9% increase in the home values this year. Consequently, the good news is we are not in a correction when it comes to the value of your house. If you are a seller, you can be confident in the current list price of your house and continued appreciation. It might not be increasing explosively, as we have seen in the past year or two, but U.S. homes will increase at a traditional and more rational rate.
What is a Real Estate Turning Point?
Some experts, while not embracing the idea of a housing correction, do acknowledge that we may be at a turning point. It might be more accurate to call it a re-turning point, because the market is returning to some of its pre-pandemic indicators.
First off, we have to acknowledge that the pandemic years of 2019-2021 were not normal in terms of real estate (or anything else we typically think of). Demand was crazy, prices were crazy, mortgage signings were off the charts and the housing inventory was very low. People’s homes became something more than homes – offices, classrooms, daycare centers and more. When the definition of something as important as “home” changes, it sends ripple effects through society. In terms of real estate, the ripples were rather substantial.
What does that look like?
- Total home sales will be at levels we saw before the pandemic, which were still great years for real estate. The “fire sale” mentality of a bidding war with other buyers, however, should be quieting down to a dull roar.
- Home-price growth will continue to increase but at a more traditional average annual rate of about 3.8% per year–not 9%.
- Inventories will bounce back, but it may take a few years to get back to pre-pandemic, normal levels.
If you are a buyer, returning to pre-pandemic housing market conditions will probably feel like a relief. It’s still going to be competitive and you will still need to stay on your toes, but with the current indicators of a slower pace, you won’t have to throw your hands up in frustration as you look for a home. If you are a seller, this is still a seller’s market and will be for the foreseeable future. However, getting offers that are $100 K over your asking price may be a thing of the past.
Impact of Millennials on the Housing Market Today
When it comes to Millennials buying houses, and what that might mean for the real estate market, the jury is still out. Some say they are starting to increase housing demand by entering the housing market. Others say, not so much.
Certainly they have waited to start buying houses because of crushing student debt, low wages, poor job prospects right out of college, and soaring home prices. Some of those economics are turning around, especially on the wage and job front.
The more important thing to understand about Millennials is their core characteristics, as outlined by Howe and Strauss. Two core characteristics are of particular interest.
Conventional When it Comes to Family and Home
Millennials are very conventional about matters of family and home, especially compared to the Boomers and Generation X. They are motivated by safety and did not embrace the extreme behaviors of previous generations. Homes and home ownership are particularly attractive to this generation.
Pressured Planners
This generation was pressured from a young age into a wide variety of sports and extracurricular activities. They are very good schedulers, which has made them much better at long-term thinking and planning than previous generations. Ask any college admissions counselor about the 5-year and 10-year plans of Millennials, and they will give you an earful.
Finally it’s important to remember that this is a big generation, numerically speaking. Depending on how you slice the demographic pie, they are as large, or larger than, the Baby Boomers (which were previously the largest generation in United States history). When you combine that with their core characteristics, this is a generation that will create strong demand and supply constraints in the real estate markets for years to come.
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