Housing Market Update: Signs of Softness

Much like the housing market heated up at lightning speed over the last year, it seems to have cooled just as quickly. As the Fed moves swiftly to combat inflation by raising interest rates, housing market dynamics have shifted significantly. Buyer demand has dried up, and prices have stalled their torrent of increases. In my last article, I discussed a potential softening in the home purchase market. Let’s now check in and see just how much changed for housing during last quarter, and consider what might be ahead.

Mortgage Rates & Affordability

Following along with interest rates generally, mortgage rates continued to rise in the second quarter, shooting above 6% – levels not seen since the mid-2000’s boom era. When combined with the huge run up in home prices over the last year, this pushed housing affordability down to levels not seen since 2006.

Buyers using mortgages seem to have dried up markedly as they are priced out or simply aren’t interested in taking mortgages at these levels. While cash buyers remain, it seems likely that many of them – at least the institutional cash buyers – will be taking steps back as well while the market cools to avoid paying peak prices for homes in their portfolios.

Without question, the continued ramp up in mortgage rates and associated drop-off in affordability has put a dent in buyer demand and caused the housing market to soften.

Supply of Homes

Indeed, there are a few ways to examine the weakness the housing market experienced in the second quarter. The number of homes available for sale tells some of the story. In Orange County, for example, the number of houses actively listed for sale has doubled since the same time last year. As buyer demand dwindles, houses are sitting on the market longer (allowing active listings to accumulate). In addition, owners are quickly bringing their houses to market in hopes of getting them sold before prices decline. Similar metrics are playing out across the nation.

In markets that experienced the hottest run-ups over the last year – places like Boise, ID, that were pandemic work-from-home darlings, active listings have nearly tripled versus this time last year. The Phoenix, AZ, market is similar, and demonstrates the rapid run-up in supply seen just recently in many markets.

Granted, the supply of available homes for sale remains absolutely low – for example, still half of what was available for sale in 2019 nationally – but this is changing rapidly and certainly has put pressure on home prices on a relative basis.

Price Reductions

Another great way to examine softness in housing is in price reductions. Again, using Orange County as an example – only about 1 in every 15 houses had a price reduction while actively listed for sale at this time last year. Now, nearly 1/3 of all active listings have had price reductions. Most of these reductions have come only over the past couple months.

And if you look at some of the previously ultra-hot markets like Boise, ID, it’s even worse – 50% of all listings have now had price reductions. The number of price reductions nationally is now around levels not seen since late 2018 – the peak of the last Fed rate-hike cycle.

Notably, while price reductions have become more widespread, they are yet to be too great in magnitude. According to Redfin, the average price reduction in Southern California markets is only around 5% so far, for example.

Looking Ahead

All told, it seems the housing market is finally showing signs of cracking under the pressure of high prices and higher rates. While price drops have only just begun, they may accelerate as demand continues to dwindle. Indeed, the downward cycle will likely feed on itself, as would-be buyers choose instead to wait to see if they can buy in at lower prices. Price declines may be buffered by still historically low supply of houses for sale, although this supply has been increasing rapidly. It seems the housing market is in for continued weakness and likely some further price declines in the months ahead.