Can the Housing Market Cycle of the Past 5 Years Help Predict the Future Market?
Real estate follows fairly predictable cycles. However, the pandemic of 2020 unseated the fairly steady housing market patterns established in recent years. This instability can make it challenging to predict when to enter the market, whether you’re buying a home for yourself or increasing your rental or investment portfolio.
The housing market of the last five years saw wild swings, with mortgage interest rates reaching record highs and lows during that period. Unprecedented competition for housing saw cash buyers jousting for sales with offers that often exceeded the selling price.
Fortunately, you can expect a return to more normal patterns as inflation and higher mortgage rates level off and buyer competition for inventory decreases.
2018 Housing Market Trends
Average National Sales Price: $240,812
Mortgage interest rates started to rise from previous all-time lows below 4%. Lower interest rates stimulated home sales in 2012 after the housing market bubble burst in 2008. They gradually increased after the 2016 presidential election, peaking at the end of 2018 at 4.87%.
The housing market experienced strong, stable growth that year. California alone felt an increase in its housing market value of over $1 trillion.
New York was the most valuable player in the housing market, with a total market value of more than $3 trillion dollars, about 9.1% of the country’s total housing wealth. Housing wealth nudged to record highs. One of the most expensive markets, Washington D.C., exceeded the combined value of homes in 40 states with a value of $892 billion.
The most significant increases were realized in areas with a more affordable housing market. People migrated from high-priced housing markets, such as Washington D.C., New York, Los Angeles, Denver, and San Francisco, to more affordable places like Phoenix, Portland, and Atlanta.
The Steady Cycle of 2019
Average National Sales Price: $249,607
The year 2019 was the last year during the past five years that could really be considered “normal” in the housing market. Economists predict that 2023 will hearken to similar conditions as interest rates and home sales continue to settle into a more normal pattern.
During 2019, homeowners tended to stay in their homes for an average of 9.75 years; today, that average is increased to more than 10 years. Like 2019, the pattern is toward an increasing number of households rather than sharing homes with friends or family.
That pattern in 2019 led to a “seller’s” housing market, where buyers were competing against one another to purchase a home. Buyers took advantage of declining interest which dipped from nearly 5% toward the end of 2018 back to 3.6% toward the end of 2019.
This dip increased the average selling price and reduced the number of homes the average buyer could afford. For example, the average Arizona household brought home $59,246 in 2018, which was sufficient to qualify for 14.3% of the housing inventory in the Phoenix metro area that year. In 2019, the average income was $62,055 but despite the increase, that figure only gave them access to qualify for a little more than 10.5% of the housing market inventory in the metro area.
2020 in Flux
Average National Sales Price: $270,354
Where the early months of 2020 followed the normal expectations of the housing market, March 2020 with its “shelter in place” mandates across much of the country threw it into a spin. Mortgage interest rates slid below 3% for the first time in history by July.
Home sales dropped in February and March. Instead of the usual spring and early summer increase in home sales, housing market sales dipped by more than 20% than the year before. The housing market increased by year’s end, thanks to plummeting mortgage interest rates, and sales rose more than 20% over the previous year.
Although the median income across the U.S. increased by 6.9% from 2018 to 2019, it decreased by 2.9% from 2019 to 2020. The median U.S. income was only $68,010, meaning that hopeful homebuyers in booming markets such as Phoenix could access around 16 to 20% of homes on the market.
2021 Begins Recovery
Average National Sales Price: $249,607
The year 2021 saw the largest increase in inflation — 4.7% — since 1990, but the median income was not statistically different than the year before. Full-time workers increased by 11.1 million.
Mortgage interest floated around 3% for the entire year, finishing with a national average of 2.96%.
The housing market became increasingly competitive in 2021, especially in boomtowns, where most homes had multiple offers above the listing price. In January 2018, roughly 20% of homes for sale received multiple offers. By June 2021, 56.2% of homes experienced buyer competition. Although the trend cooled down by year’s end, it stayed above 42%, leaving sellers expecting to choose from more than one offer.
2022 Sees Rising Inflationary Repercussions
Average National Sales Price: $357,544
Inflation increased more rapidly in 2022. Over the first seven months of 2022, inflation rose 5.4%. Between July 2021 and July 2022, inflation increased 8.5%. Migration hotspots suffered the highest inflation for goods and services, with Phoenix experiencing 13.1% year over year in the third quarter. Atlanta, Tampa, and Miami also had double-digit inflation in the third quarter, compared to the US average of 8.3% for that quarter.
Competition for available housing market inventory was fierce with more than 59% of homes for sale during the spring of the year receiving multiple offers. The competitive trend dropped steeply during the summer, and by November 2022, was back to pre-pandemic levels of less than 30%.
Migration continued toward less expensive states with municipalities in Florida taking five of the top ten spots of most sought-after communities. In California, people exited expensive markets like Los Angeles and San Francisco.
Rent prices continued rising steadily, with the median asking price rising 7.4% across the nation. Pandemic boomtowns with formerly inexpensive rent saw the biggest increases: Raleigh, North Carolina saw a rent increase by a whopping 21.8% and Oklahoma City by 15.8%. Other metro areas with steep rent rises between 10 and 15% included Memphis, Pittsburgh, Salt Lake City, Nashville, and Cleveland.
Increasing rent prices motivated renters to buy their own homes, but increasing home values and mortgage interest rates above 7% precluded many. In Maricopa County, Arizona, where Phoenix lies, the mortgage that cost $1,265 a year before now costs $1,930 for less home than the year before.
Rent levels in the Phoenix metro area only rose 1.7% compared to the national 7.4%, making this pandemic boomtown a desirable “wait and see” location for borrowers hoping for a decrease in both interest rates and home prices.
Looking forward in 2023
So, what does 2023 hold for the housing market? Economists predict settling into a more normal pattern, not far from that of 2019.
Interest rates are expected to level off during 2023. That could be good news for buyers and investors who can work with 7.5% mortgage interest rates.
The value of the housing market could decrease by a predicted national average of 4%. Those buying homes post-pandemic, on average, won’t find themselves owing more than their home is worth unless home values tank by double digits. The recent increase in home values means that most borrowers across the nation that bought during the pandemic years will be able to sell their homes without having to exit via foreclosure.
Pandemic boomtowns will likely see an increase in foreclosures. Approximately 9.2% of Sacramento borrowers will be underwater on their mortgage if the housing market value dips by 4%. In Phoenix, 7.3% of borrowers would owe more than their home is worth.
Virginia Beach originated many $0 down VA loans and could also see 7.3% of homeowners upside down on their mortgages. Should the dip in the housing market exceed forecasts, this community will quickly be at risk for the largest number of foreclosures. At 8%, the number of upside-down borrowers would outpace Phoenix, and at 12% decline, would hold the largest tank of underwater borrowers in the country.
Rent occupancy rates should decline but remain above 94%, the normal low for the industry. This means multi-housing owners can start to anticipate normal seasonal demands similar to pre-pandemic cycles.
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