When is the Housing Correction Coming?

In late 2020, early 2021, the housing market boomed as trillions of dollars were dumped into the economy in form of stimulus from the Covid 19 pandemic. A mixture of low home inventory, cheap money (interest rates), and remote working boomed, bubbling the housing market to levels not seen in decades. The Boise, Idaho market saw list price increases of 26% YoY and home values jump 14%. Other markets like Austin Texas saw list price increase 25%, home values jump 22%, and rent increase 22% YoY.

These numbers might appear fantastic, but smart investors know what artificially goes up, must come down. The term artificially is used on purpose. As previously mentioned, the housing craze was mostly caused by an influx of money being poured into our economy. Together these factors increased home prices to what they are today, unaffordable. These elevated home prices have caused a bubble in the housing market. This idea is nothing new.

Lack of Demand = Lower Prices.

When frustration with overvalued homes started to mount, people began to wonder when prices would come back down. One main consensus was once interest rates rose; home prices would fall due to lack of demand. Over the past year and a half, mortgage rates have risen between 3%-7%. However, the housing market remains resilient.

Housing Supply.

Data shows the strength of the market is coming from supply rather than demand. The supply of homes come from two places:

• New Builds

• Pre-owned Homes

The supply of homes available for sale is down over 30% in 8 months. This statistic shows as interest rates went up, people stopped listing their homes on the market. New home builds (leading recessionary indicator) also saw a declined during this period. Private US home building permits fell to 1.41 million from 2 million.

US Housing Starts/New Builds are also down 22% over the last year.

Lumber (commodity) is down 71% from the start of 2022. This emphasizes the lack of demand the building market anticipates.

Home Affordability.

Is buying a house “affordable” in this market? The median rent in America is $1,850 and the medium house payment is $2,700. Buying a new house costs 45% more than renting and this is without a down payment.

And it gets worse. In California, a house payment is nearly 145% more than a rent payment. Here is a list of the top 10 states by median monthly house payment:

What does this mean for a housing price correction?

The reality of the situation is unaffordable home prices should steer the market in the right direction (down). And for the market to see a correction, interest rates will need to fall. As long as interest rates don’t fall to steep, a meaningful price correction should occur in the housing market. A likely sweet spot is for interest rates to land in the 4% range.

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