The latest figures don’t exactly paint a rosy scene for the US housing market, signaling a multitude of hurdles for both future homeowners and those wanting to sell. This past Thursday, the National Association of Realtors unfurled a report that revealed substantial nosedives in existing home sales, eerily evoking shades of the dark days of the Great Recession. Coupled with persistently steep house prices, this brews up quite a challenging cocktail for anyone aspiring to jump into the market.
Key Statistics From September:
- Existing home sales declined to an annual rate of 4 million, a number that has not been seen since the aftermath of the 2007-08 financial crisis.
- The median home price was $394,300, marking a 2.8% increase from 2022 but a 3.1% drop from August.
- Almost 50% of homes sold in September were in the South.
- Homes priced between $250,000 and $500,000 accounted for most sales, yet this category saw a decline of 15.5% from the previous year.
- Sales of homes between $100,000 and $250,000 experienced the steepest drop, decreasing by 23.4% from September 2022.
Reasons Behind The Slump
Multiple factors are contributing to the current challenges faced by the housing market:
- Elevated Prices: The median sales price in September of $394,300 places it among the highest months since 2000. This has been attributed to several factors including inflation and external economic pressures.
- Tight Inventories: There is a mere 3.4-month supply of homes on the market based on the current rate of sales. Ideally, a balanced market would have a 4- to 5-month supply.
- High Mortgage Rates: With the 30-year mortgage rates currently at 7.63%, many homeowners who had benefited from low rates in the past are reluctant to take on new, higher-rate mortgages.
Future Projections and Market Outlook
Despite the gloomy state of the housing market, the future doesn’t seem to promise immediate relief. Federal Reserve Chairman Jerome Powell has cautioned against expecting interest rate cuts in the near future. The focus, he emphasized, is on reducing inflation sustainably to 2%. With inflation now outpacing the Fed’s aims, it looks like the standard rate isn’t coming down anytime soon.
This means that the Federal Reserve’s firm stand could be a real snag for any potential homebuyers out there, gearing them up for even tougher times on the horizon. Notably:
- Mortgage rates are on the brink of reaching 8%.
- The cost of an average-priced home now demands 40% of the median household income, making housing the least affordable since 1984.
- To achieve affordability comparable to long-term averages, drastic measures would be required. These could include a 37% drop in home prices, mortgage rates reducing by 4 percentage points, or a 60% surge in median household incomes.
The Balancing Act of the Federal Reserve
The role of the Federal Reserve in this current housing market predicament cannot be overstated. While its primary objective remains to ensure long-term economic stability, its decisions on interest rates inevitably ripple through sectors like housing, affecting millions of individuals.
There’s a genuine concern about the Federal Reserve’s tightrope act. On one side, being too cautious could let above-target inflation become a new normal, which could in the long run necessitate even more aggressive monetary policy actions. These could detrimentally affect employment and disrupt the broader economy. On the other hand, acting too aggressively might inadvertently stifle economic growth and harm sectors still recovering from previous economic downturns.
Implications for Buyers and Sellers
Given the current state of the housing market:
- For Buyers: Our current times seem to indicate a perpetual tug-of-war with affordability. Especially for those dipping their toes into the property market for the first time, it’s getting a tad too hot for comfort. Picture this: mortgage rates are drawing dangerously close to that big, bad 8% number, potentially bumping up the required yearly income to snag an average American house to a whopping $114,000. Now contrast that with the middle-of-the-road household income in 2022 at just over $74,500 and you get a mental image of tight budgets and strain for numerous families across the U.S. of A. And let’s not forget – buyers must not only juggle with these high-level mortgage rates but also brace themselves for any sudden jumps they may see shortly down the line.
- For Sellers: The high prices might seem favorable initially. However, the dwindling number of potential buyers due to said prices and mortgage rates could mean properties stay on the market longer. The reduced demand might eventually pressure sellers to lower their prices or offer additional incentives to entice buyers.
The housing market’s current trajectory seems to favor those who can navigate the high prices and interest rates. However, for many would-be homeowners, dreams of purchasing property might remain out of reach for the foreseeable future. As John Toohig of Raymond James aptly summarized, while the market might maintain its current stance due to a robust labor market, an overly aggressive Federal Reserve could risk overcorrecting, leading to potential market disruptions.