The process of buying a home is an extremely emotional experience. Not only is a home the largest purchase most people will ever make, but many consider it a core component of the American Dream.
With the current market conditions, these emotions are at their height – mortgage interest rates have hit a 20-year-high, and the supply of homes for sale have hit a 30-year-low. To help you navigate the current state of the housing market and the uncertainty it presents, let’s discuss where we are and how it compares to historical data.
Where We Are
Currently, the national average for a 30-year conventional fixed mortgage rate is 7.25% – the highest it’s been in 20 years. Housing prices fell in February 2023, snapping a decade-long streak of growth. This 0.2% drop over February 2022 is the first time the housing market has seen a drop since 2012, which was the tail end of the housing crisis of ‘08.
Inventory of existing home inventory was at an all-time-high of $4.0M in 2007, just before the housing crisis of ‘08. We saw a steady decline during this crisis with a leveling off in 2012. But since the start of the pandemic, we have seen a steady decline and the lowest supply in over 30 years, at just under $1.0M homes.
What is Causing Such a Low Supply?
Currently, 80% of borrowers have a mortgage interest rate below 4%. If those homeowners have considered selling, they are not in a hurry to trade their historically low interest rate for the current rate of 7.25%. So, they’re sitting on the sidelines, hoping that interest rates will fall.
With that being said, there is evidence to show that there are many who would sell if the economic situation were different. July’s Anytime Estimate American Home Buyer Survey shows that recent home purchasers have a lot of buyers remorse, with 30% of respondents saying they spent too much money and 26% saying they bought too quickly. This indicates that the existing home supply could increase rapidly when interest rates decrease.
Consumer confidence in the housing market has also hit new lows. According to a monthly survey by Fannie Mae, people who believe it is a good time to buy decreased from 19% to 16%, people who believe home prices will go up in the next 12 months decreased from 32% to 30%, and people who believe mortgage rates will go down in the next 12 months decreased from 9% to 6%.
What Could a Recession Mean for the Housing Market?
Since The Federal Reserve has been raising interest rates, there has been a lot of talk about a pending recession. I’m not here to make a prediction either way, but let’s look at some historical data from the last few recessions.
Historically, the housing market stays strong during a recession.
As you can see from the above graph, there is one exception to the strength of the housing market during recessions, and that was during the housing crisis of ‘08. This crisis was very specific to housing and mortgages and was very different from where we are today. In the crisis of ‘08, unemployment was much lower, total jobs were much lower and subprime loans were everywhere.
On the other hand, mortgage interest rates have historically gone down during recessions. Since 1971, mortgage interest rates have gone down in every recession.
The Bottom Line
If you don’t currently own and are able to afford the total housing costs with current interest rates, now may be a good time to buy. An increase of real estate transactions driven by a drop in interest rates could increase home values.
Accepting the current higher interest rates as the new normal – and refinancing if interest rates come down – may be in your best interest.
Of course, everyone’s situation is unique, so we would be happy to discuss any concerns you have. If you would like to discuss this topic further, you’re welcome to set up a consultation with our team of financial advisors.
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