There are a lot of headlines out there touting the possibility of a housing market crash in 2023. Some predict a double-digit decline similar to the Great Recession of 2008. However, I'm here to explain why this time is different, citing reasons such as housing inventory, inflation and its correlation to interest rates, a looming recession, and unemployment.
Let's start with housing inventory and the importance of understanding how it impacts home prices. As of April 2023, total housing inventory units stand at 980,000 which represents 1.3 months of supply. During the 2008 crisis, we had over 4 million units available. A normal market is considered to have four to six months of supply.
In the five years leading up to the 2008 crisis, builders constructed 7.6 million new homes. In contrast, in the past five years, only 4.6 million units have been built, indicating a shortage of 3 million units. In addition, building permits have declined. Therefore, we don't anticipate a significant increase in inventory.
Another factor that contributes to housing inventory is Baby Boomers who prefer aging in place, and most of them have no mortgage. Furthermore, existing homeowners are unlikely to move from a low mortgage environment to a new property unless a major life event occurs. This all leads to the belief that housing inventory will likely remain an issue, keeping home prices elevated.
Now, let's discuss interest rates and their potential trajectory. By following inflation numbers, we can gain insight into interest rate trends. Observing the chart provided, we can clearly see the correlation between 30-year mortgage rates, 10-year treasury rates, and inflation numbers.
The good news is that inflation numbers are starting to decrease. Recent reports, such as the consumer price index, indicate a growth rate of 4.9%, down from 5% the previous month and significantly lower than the peak of over 9% in June of last year.
Additionally, the producer price index demonstrates a 0.2% month-over-month growth and a 2.3% annual growth, the slowest since 2021.
These signs of decline are favorable for our interest rate outlook, and they might prompt the Federal Reserve to adopt a more cautious approach. Therefore, it is essential to stay informed on this matter.
While there is much discussion surrounding an impending recession, it is important to understand its implications for home prices. Housing typically enters a recession earlier than the overall market, serving as a precursor. Currently, signs indicate that the housing market has turned a corner and is gradually recovering from a low point. Economists widely believe that an overall market recession will occur in the latter half of the year, with much attention focused on unemployment figures. Therefore, monitoring the unemployment numbers will provide valuable insights.
Analyzing the last six recessions, we can observe that home prices increased in four out of six cases. There was a slight decrease in one recession, and the 2008 crisis was a completely different story.
As far as interest rates during a recession, you can see here that in all six of the last recessions, we actually saw a decline in interest rates.
Thus, experiencing a recession may not necessarily be so bad for home prices or interest rates. In fact, we may even witness an actual increase in prices.
Now, let's explore the potential effects of a significant increase in unemployment on home prices. Recently, jobless claims rose to approximately 264,000. Although this figure is still below the target of around 325,000 on a four-week moving average, surpassing this threshold, in conjunction with other indicators, would signify a full recession.
But as far as unemployment, you can tell from this chart below that historically it's hit a cyclical low prior to a recession. And guess what? In January we hit a 53 year low of 3.4%, and it's been slightly trending up since then. So maybe that's the start of the next recession? As you can see, unemployment climbs during a recession and peaks just after the recessions.
Logically, one might expect that higher unemployment rates would either lead to an increase in foreclosures or more homes being sold, thereby increasing inventory. However, considering the current housing market, foreclosure rates are unlikely to rise significantly due to the substantial amount of home equity present. Many homeowners can sell their properties and avoid foreclosure.
While it is plausible that increased unemployment could lead to more homes being put on the market, it is crucial to note that a decline in interest rates may occur simultaneously, as noted above. In such a scenario, the high demand from potential buyers (we see signs of major pent up demand waiting for rates to come down), coupled with lower interest rates, would likely more than offset any increase in inventory. Consequently, it is logical to assume that home prices would remain unaffected by unemployment.
In conclusion, although certain hot markets such as Boise, Idaho, and Austin, Texas, and many areas in the Southwest that have experienced some declines in home prices, it is important to remember that real estate is market-specific, and there is no one-size-fits-all answer. These markets saw an outpaced increase in prices during the boom years and thus have had some correction. Overall, we do not anticipate the major declines witnessed during the 2008 financial crisis. This time, the lending policies are more stringent, and there is less risk of individuals purchasing homes they cannot afford. The data also indicates that the decline in the market (with increasing foreclosure numbers) began years before the crisis hit, unlike the current situation. With overall equity at all-time highs, the likelihood of a similar scenario occurring is low.
While concerns about a decline in home prices persist, my primary concern lies in the potential decrease in interest rates if we enter a recession. The pent-up demand, coupled with lower rates, could result in another buying frenzy similar to the one observed during the pandemic. Although it might not reach the same intensity, it is a more probable outcome than a major crash in home prices.
Let's stay in touch!
Comments