The Reverse Housing Market Crash of 2023

Home prices are weakening in some of the still hottest migration markets, in part because of higher mortgage rates, but also due to the demographic makeup of those moving in. This is according to a new study from Bank of America. In the last 30 days, housing prices have fallen by percentages not seen since 2011, despite mortgage rates and overall housing prices steadily increasing over the past few years. This forecast suggests a higher likelihood that house prices will start to rise for the remainder of 2023. As a result, several experts have begun to warn that this could cause a new problem in the housing market, which is already having some negative effects thus creating a so-called reverse crash. That's why we will take a deeper look into what is happening in the real estate market, the most recent data, and why house prices have varied so much depending on their location. Before I get into the details, please like and subscribe to this channel if you'd like to stay up to date on topics like this. To understand everything that is currently happening in the real estate market, we need to bring up a not-so-well-known term called, market seasonality. Although housing prices have generally always been on the rise throughout history, if we delve deeper, we can see that there are consistent and predictable price fluctuations that occur regularly. As you can see, we are currently in one of the most challenging times to buy a house. Because according to the National Association of Realtors the trend among buyers suggests that they move and buy a house during the spring and summer, which leads to an increase in home sales in the mid-year and, consequently, a price increase. Although most of these seasonal price variations tend to generate a fluctuation between 8% and 12% in the normal price of a house. Some areas of the country such as the Northeast and the Great Lakes have experienced variations of up to 22.1% between summer and winter selling prices. This means that these places will be the most competitive throughout the year for buying a house. However, here is where things take a rather unexpected turn, despite almost a third of homes being sold above the listing price. The average home for sale receives about 3.3 offers, and 25% of market offers are cash offers. In addition, house prices dropped last month for the first time in six years. However, this downward trend is about to become much more complicated simply because the number of homes on the market is rapidly decreasing. This week marks the first time there have been fewer active listings compared to the previous year, which is the key reason why prices have barely moved since their peak. In fact, what is notable is that new listings this week have decreased by 29% compared to last year. Despite an increase in seller confidence. This means that although sellers are becoming much more optimistic about the value of their homes, they still refuse to move. All of this comes down to the so-called monthly inventory supply, which is essentially the number of months it would take to sell all the inventory of homes. For example, if there are a thousand homes on the market with 200 homes being sold monthly, it would have a five-month supply. Typically, if there is more than six months of inventory on the market, it is a buyer's market. On the contrary, if there is less than six months, it is considered a seller's market. In the current market, the inventory of existing homes represents only a 2.6-month supply. Because homebuilders are starting to fill the void with new constructions, which now represent a third of the total market inventory compared to the years 2000 to 2019. In other words, home prices are effectively plummeting upwards simply because there are very few properties on the market. All of this is a consequence of something called the lock-in effect, as 92% of homes with mortgages have an interest rate below 6%, and 62% of homes have an interest rate below 4%. So instead of selling and being forced to take out a higher-interest mortgage since interest rates have risen in the past year, sellers choose to stay in their homes resulting in fewer homes being sold than usual. Furthermore, mortgage rates are also a significant factor. For example, someone with a mortgage rate of 2.5% or 3.5% would be much more likely not to sell their home compared to someone with a 5% mortgage rate. That is why national house prices have barely dropped despite the spike in mortgage rates. This is also the second time since last August that the sales-to-list price ratio is 100, meaning that the average home is now selling for exactly the listed price. Now, to understand what is happening, it is important to know that when it comes to interest rates, they also tend to fall into the same category. In a hypothetical scenario, if you currently have a 30-year fixed-rate mortgage in the range of 2.5% to 3.5%, and you had to sell it to buy another property, you would have to pay more in interest to the point where selling wouldn't make sense. However, you shouldn't get your hopes up yet, because it is projected that housing inventory will experience a small 5% decline by 2023. As early gains turn into declines in the second half of the year, it is expected that price growth will decrease by 0.6% for the remainder of the year. Of course, these are just averages across the United States, so some locations might see gains or declines. Now, for the average American, saving enough money to buy a house is very challenging today, as it would take the average homeowner almost 8 years just to save for the down payment which is usually 20% of the value. Additionally, this is also due to bad habits we have as buyers, as the average American spends around $18,000 per year on non-essential items. Now, there are 5 main reasons why it is highly unlikely that housing prices will move much in the next year. The first reason is that inventory is too low. As I mentioned before, sellers who already have a low interest rate are locked into their homes, unless they are forced to sell. This forces buyers to bid on the remaining inventory of homes at high levels and compels construction companies to build homes as quickly as possible. Secondly, builders cannot produce enough homes. As we can see in the graph, new home constructions reached their peak in 2007 and 2008, and since the 2009 financial crisis, homebuilders have never returned to those levels. Various impediments such as regulatory approvals and rise in construction material costs have made it very difficult for builders to produce homes at pre-crisis levels. The third reason is that demographic changes are being made to attract new buyers. For example, millennials represent 43% of the total real estate market, which is the largest share of any generation, and they prioritize factors such as affordability, larger homes, renovations, and location. The fourth reason is that banks are currently offering fewer loans than usual. That's why nowadays obtaining loans is considered very difficult, but in the future, these loans will likely be given to more people, leading to a surge in buyers. Finally, the fifth reason is that foreclosures are rare. Most homeowners only let their homes go into foreclosure when they owe more than the house is worth, and that is really uncommon. In those cases, if a buyer truly cannot afford the payments, they would sell their home and get a higher price than what they paid, potentially even making a profit. To illustrate how rare foreclosures are nowadays, we can see in this graph that they have plummeted since 2009. Now, regarding what we can expect in the near future, it seems that the majority of analysts agree that national housing prices will vary throughout the coming year. But to be better prepared for what is to come, it is important to know where housing prices are falling. The biggest declines have been reported in Austin, Texas, with an 11% decrease, followed by San Jose with a 10.9%, Oakland with a 10.4%, and Sacramento with a 7.7%. On the other hand, prices have increased in places like West Palm Beach with a 15%, Milwaukee with a 13.2%, Columbus with a 9.5%, and finally Miami with a 9.1%. Of course, we can see that there is a great divergence between the East Coast and the West Coast when it comes to house prices. But why does this happen when these two areas are within the same country? We explain the reasons for this in detail in this video right here. Let me know your opinion in the comments, and don't forget to like and subscribe. See you next time.