Despite a shortage of housing and a rise in inflation, one economist says the housing industry is still strong.
There’s no reason to worry, says Jeff Tucker, senior economist at Zillow, a real estate marketplace. He predicts a cooling period will provide a much-needed rebalancing from the “unhealthy” market conditions seen over the past year.
This March, the national inventory was 52.2% below what it was in March 2019. Because of the shortage of homes for sale — brought on in large part by the pandemic — those who could afford to buy a home were snapping up whatever was available in record time.
Rather than sitting on the market for months, homes in the most in-demand markets have been selling within a few days, with sellers fielding multiple offers.
During the past 14 months, the continuing shortage of new homes for sale, coupled with increased demand, has caused home values to rise, with year-over-year growth reaching double digits.
The average home value in the U.S. is up almost 20.6 % compared to March of last year, according to a Zillow research report. Home values have increased 32% over the last two years.
This dramatic jump in home values has put homeownership out of reach for some would-be buyers.
“First-time buyers, especially, are quickly losing ground — trying to scrape together a down payment large enough to compete with homeowners flush with equity, and with exploding rent prices eating larger holes in their paychecks each month,” Tucker acknowledged.
However, rising home values, combined with rising mortgage rates, appear to have reached the tipping point, causing home sales to slow down a bit.
In February, newly-pending home sales had declined by 15% year-over-year. In March, newly-pending home sales were down 19% from the year previous, according to the Zillow research team.
According to FreddieMac, rising mortgage rates are increasing monthly payments by nearly one-third compared to a year ago. Many first-time homebuyers are contributing to this trend.
In the months ahead, monetary policy and inflation will likely discourage consumers, lowering purchase demand and slowing home price increases.
Some experts, like Airbnb co-founder and CEO Brian Chesky, have expressed concern about another housing market crash similar to what happened in 2008.
Chesky tweeted: “This moment feels similar to late 2008 when we started.”
Tucker disagrees, citing several reasons he believes the housing market is still on solid footing and not headed for a crash.
For one, he said, homebuyers are enjoying more financial stability.
According to a report from the Federal Bank of New York, most new home buyers had a credit score over 760, with only 2% of new mortgages going to subprime borrowers, a sharp contrast to the 12% average seen between 2003-2007.
Another telling sign is the share of mortgage balances delinquent 90 days or more remained at a historic low of 0.5%, compared to the all-time high of 14% in 2007, as reported by the Federal Reserve Bank of San Francisco.
“Buyers are purchasing homes they can afford without resorting to risky, exotic financial products like they did before the last housing crash,” said Tucker.
Demand will also continue to remain high due to many millennials — the largest generation in history — entering the age in which it is a priority to purchase a home.
In addition, the national market is still about 1 million homes short of meeting demand, fueling competition for properties.
According to a survey of experts conducted by the Zillow research team, 37.9% of respondents expect housing inventory to return to pre-pandemic levels by the end of 2024. Another 36.8% believe it could happen even sooner — by the end of 2023.