After two tumultuous years of moon-flying house prices, don’t hope for a major correction. Why COVID-era real estate values ​​are here to stay.

There is hope for first-time buyers looking to enter the US housing market, but observers say they will have to wait.

After a two-year surge in house prices during the COVID-19 pandemic, the housing market is finally showing signs of cooling – in terms of demand and sales, if not these persistently high prices – partly due to rising interest rates, high prices due to a lack of quality inventory, inflation , affecting commodity costs, and a volatile stock market. New home sales in April fell to their lowest level since the pandemic began for the fourth straight month.

Affordability remains a challenge. The average selling price of homes in the first quarter of 2022 was $428,700. up 30% from $329,000 in the first quarter of 2020. Mortgage rates rose to over 5.25% from 2.75% in the fall for a 30-year lock-in. Redfin RDFN,
estimates that 8.2% of homes are worth $1 million or more, equivalent to 6 million properties, up from 3.5 million homes, or 4.8% of the nation’s housing stock two years earlier.

Pandemic-era prices, as they are now, could be here to stay. “It’s entirely possible that prices will level off and not change significantly over the next few years,” said Greg McBride, chief financial analyst at personal finance website “This would benefit first-time buyers as their income could catch up somewhat with the cost of home ownership, but this would unfold over a 2-4 year period, not the next 2-4 months.”

House prices are on a crack. The average selling price of homes was $428,700 in the first quarter of 2022, up 30% from $329,000 in the first quarter of 2020.

— YouGov

McBride warned potential buyers hoping for a significant price correction. “Sellers have put houses on the market asking for moon prices,” he said. “In an area where houses were selling for $600,000 a year ago, a seller might now be asking for $800,000. Sure, they might have to lower the price a bit and end up selling for say $725,000, but that’s still a lot more than the $600,000 it would have sold a year ago.”

According to a YouGov survey of 1,000 adults, just 6% of homeowners said their homes have fallen in value in the past year. Last month detailed average house price declines that were small by Great Recession standards. These declines came in arguably already challenging areas of the US. The biggest declines included Toledo, Ohio (down 18.7% since 2021), Rochester, NY (down 17%) and Detroit, Michigan (down 15.4%).

( is operated by News Corp subsidiary Move Inc. and MarketWatch is a unit of Dow Jones, also a subsidiary of News Corp. NWSA,

Rod Smyth, chief executive officer of RiverFront Investment Group, a global wealth manager, believes that real estate prices are at or near a peak, while prices are likely to fall in overly speculative markets. “However, due to strong supply/demand conditions, we believe most markets will ‘rust’ rather than ‘burst,'” he said. “By rust, we mean that nominal (non-inflation-adjusted) prices could fall somewhat or stagnate at current levels for several years.”

That’s not to say there aren’t significant risks of a correction, especially as the Federal Reserve is trying to walk a tightrope in raising interest rates without pushing the economy into recession. Of course, there is no clear consensus on how long or severe a recession would last. As Greg Handler, head of mortgage and consumer credit at Western Asset Management, told MarketWatch, “Are you actually seeing a correction or an over-correction? I think there’s obviously some risk there.”

Just 6% of homeowners said their homes have fallen in value over the past year, and many of those declines are arguably due to the already challenging real estate markets.

— YouGov

In contrast to the 2008 housing crash, Bob Griffith, general manager, home services at Houwzer Mortgage, a real estate and mortgage brokerage headquartered in Philadelphia, said credit standards remain high. “Homeowners have accumulated equity from the hot housing market and can take a bit of a shock in the unlikely event that there are regions in the US where home prices have been flat or falling for a period of time. Homeowners with good credit and equity in their homes are not going to mail their keys to their lenders and then walk away.”

Rising interest rates and home prices have shut many first-time homebuyers out of the housing market. “Fixed rate mortgage rates have recently settled in a range of 5.25% to 5.50% after rising about 1.25 points since late March,” Griffith said. “And last week we saw signs that home prices could be stabilizing as the inventory of homes for sale increased and the percentage of homes bought for less than list price increased. These developments, if they continue, will help new buyers looking to enter the housing market.”

Some other encouraging data: More than half (58%) of Americans say they own a home, and nearly 30% say they actually own their home outright, the YouGov poll also found. (US Census Bureau five-year estimates, published in 2020, found that a slightly higher proportion (38%) of owner-occupied units own their home freely and clearly.) “As for those who have already paid off their mortgages, that’s neither here nor there as it it’s about finding new buyers to enter the market,” added McBride.

The proportion of homeowners who own their homes for free and with no restrictions is due to the greater number of older Gen X and Baby Boomers owning their homes compared to Millennials and Gen Z. Millennials’ home ownership rate, at 43%, was well below the national average of 65%. , as of 2019, per estimate compiled by Freddie Mac
citing “delayed marriages, financial challenges faced by racial and ethnic minorities, lower financial security and higher levels of debt”.

But more homeownership opportunities await first-time buyers, even if it will take several years. “Rising home prices and a record-low supply of affordable housing for sale have also hampered homeownership,” noted a Freddie Mac report on millennial homeowners released last year. “On the other hand, as more millennials reach 40, their rate of household formation will accelerate due to higher marriage rates and more stable incomes.”

The Dow Jones Industrial Index DJIA,
S&P 500 SPX,
and Nasdaq Composite COMP,
closed on Thursday, as minutes from the Fed’s last meeting signaled that the central bank would hike another 50 basis points in June and July as policy moves “fast” towards the projected neutral interest rate. Shares of homebuilders who had endured a tough 2022 also rose on Thursday, including Meritage Homes MTH,
lennar corp LEN,
and Eagle Materials EXP,
+1.90%. After two tumultuous years of moon-flying house prices, don’t hope for a major correction. Why COVID-era real estate values ​​are here to stay.

Brian Lowry

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