As mortgage rates have easily breached 5% (last I checked they were at 5.25%), there is a drastic change in real estate that is just beginning to rear its head. At the same time inventory is starting to increase and loan volumes have plummeted. What is the big change that is happening? Why is it happening now? What does this mean for values? What three indicators am I seeing pointing to a change in the market.
3 indicators that real estate has reached an inflection point
- Title turn times plummet: Last week I ordered a title policy for a new loan, average turn times were running 3-5 days, this one turned around in one day. This is a huge change and indicative of a rapid slowdown in the market with considerably less transactions.
- Inventory creeps up: In Denver inventory of single-family detached homes has rebounded to levels unseen since last fall. In March 2022, there were 1,627 active listings, the most since last October and double the inventory from February. This March even exceeds the number of listings from a year ago by more than 500 homes.
- Consumer sentiment plunges: According to Fannie Mae, the largest buyer of mortgages, consumer sentiment to buy a home hit a record low with set a new survey low, with 73% of respondents reporting that it’s a bad time to buy a home. Year over year, the full index is down 8.5 points. If consumer pessimism toward homebuying conditions continues and the recent mortgage rate increases are sustained, then we expect to see an even greater cooling of the housing market than previously forecast.”
Along with the three indicators, I’m hearing an overall feeling in the market that something has changed substantially.
What is driving the recent real estate inflection point:
- Mortgage rates skyrocket: Mortgage rates have almost doubled in the last 12 months after hitting a low of 2.5% they are now around 5.25%. This is the fastest rise since the early 90’s and is having large impacts on housing budgets.
- Prices: Prices have been rising considerably faster than incomes. It seems prices have hit their peak as affordability is now limiting the number of prospective buyers. With rising prices coupled with rising interest rates the real estate market has finally hit a wall.
- Inflation/economic headwinds: A lot is going on in the world from inflation, the Ukraine war, falling stock prices, rising energy costs, etc… all these items are weighing on consumer confidence.
An end to the Covid real estate party
Gone are the days of 20% plus appreciation and twenty offers on a house. The market changes are underfoot and occurring very quickly. I’m seeing this in the transaction volume, rising inventories, rising rates, and a rapid decline in consumer sentiment.
Where do real estate prices go over the rest of the year and into the future?
Remainder of 2022 real estate predictions: The spring selling season is already starting off soft as rates have risen rapidly. The rest of 2022 will slow dramatically with appreciation averaging closer to 3-5%. After the spring season, we should also see more inventory hitting the market and competition for houses slowing dramatically.
2023 and beyond real estate predictions: As inflation continues to roar, it is becoming increasingly unlikely that the federal reserve can engineer a soft landing. Inflation does not look likely to go away easily without a strong monetary response. The Federal reserve will have to raise rates considerably more than the market is anticipating to slow demand. Mortgage rates likely will top 6% in 2023 and the economy will drastically slow from where it is today.
I see a correction in real estate values in many markets ranging from 10-15%. Although this sounds like a big number, housing has gained well over 50% in most markets after the last recession so values would still be up considerably.
Real estate has reached an inflection point as mortgage rates skyrocket, inflation/consumer sentiment takes it toll, and prices remain higher than incomes can support. The swiftness of the changes is unprecedented as mortgage rates have almost double from their lows of 2.5% to well over 5% and the prospect of 6% rates not out of question.
In the short term, real estate will perform okay the rest of 2022 with appreciation moderating to a more historic 5% or so. Long term real estate looks a little rockier with real estate in many markets sometime in 23 best case staying constant, but likely scenario is a 10-15% price reset. Although this seems like a large drop, many markets are coming off 20-30% annual increases the last several years. Note, there is a possibility for a larger drop if the federal reserve is unable to quickly get inflation under control and rates go much past 6%.
- DENVER HOUSING PRICES: Denver area housing inventory expands, prices increase | FOX31 KDVR
- Here’s how rising interest rates are impacting housing market – Chicago Tribune
- Mortgage Rates Hit 5% for First Time Since 2011 – WSJ
- Mortgage forecast lowered as rates soar, refinancing falls (cnbc.com)
- Mortgage rates hit 5% for the first time in over a decade | CNN Business
- Consumer Pessimism Regarding Direction of Mortgage Rates Hits New Survey High | Fannie Mae
- Denver named in the top 5 least affordable metro areas in the US – Denver Business Journal (bizjournals.com)
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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