Fall 2022 Market Update – Why the Bubble is NOT bursting & sellers still have an edge.

Contrary to most Headlines & other ‘Market Experts” I do not believe the US Housing market is a ‘Bubble about to Burst’ or that there will be a crash in home prices. The reason is simple Supply & Demand. While it is true that inventories are rising, homes are sitting longer & raising interest rates have pushed some buyers to the sidelines, there are still more potential buyers reaching average first time home buying age than there have been in 20 years. As shown the the above chart, this influx of buyers peaks next year but the number of 1st time home buyers remains higher than the last few years for 8 to 10 years.

To understand how demographics affect housing, one must go back to the housing crisis in 2007 – 2010. Referring back to the chart, you see US births dropped sharply starting in 1972 through 1976. With an average first time home buyer age of 30 at that time, this meant a shortage of buyers in 2002 through 2006.  Few buyers meant few home loans, so banks started getting creative with mortgages. Lending standards were lowered, loans made & banks made their money by repackaging & selling loans as securities. Loan, package, sell & then do it again. In turn, this encouraged builders to build too many houses. The home ownership rate raised to an all time high of 69.2% in Q2 2004.  But by 2007 loans defaults rose as homeowners could not / did not make their payments. By the fall of 2008 lending froze, no one could buy except with cash, sellers had no equity because of plummeting prices. If you were there, I need explain no more.

Other demand side factors are high immigration, an ever increasing population and household formation rate, and COVID induced migration patterns turning renters into buyers. These we will leave for another day.

The other side of the coin – Supply

The other side of the coin is the inventory of available homes to buy.  Several factors are at work here, but we must again revisit the 2008 to 2012 Housing Crisis to put it in context.  As I mentioned, in the early 2000’s builders reacted to the demand caused by easy mortgages by building an average of 1.75 million homes a year from 200o to 2006, peaking at 1.98 million in 2006.  This created an oversupply of houses to buy that started to show in 2006. Sellers also came out in droves to take advantage of high prices and / or avoid the impending downturn. This increase of supply with no buyers was one of the drivers of the the Housing Crisis.

Most builders were wiped out by the Crisis & an average of just under 1 million homes a year were built between 2007 & 2020, dropping to a low of 585,000 in 2011.  With an average of 1.3 million to 1.6 million new homes are needed each year, depending if you count vacant homes, 2nd / vacation homes, & Built to Rent (BTR) homes, this created a shortage of homes which was compounded by institutional buyers buying to fill increasing rental demand. The resulting shortage accumulated to  3 million homes by 2020, and shown by this chart (click image to enlarge), just barely met demand in 2021 & so far 2022. Adding to the inventory shortage are home owners staying longer as they do not want to give up the low interest rate by selling. The result is an expectation of lower than normal inventory, even going into the next few months & year ahead. 

Fall 2022 & beyond –

Moving forward we are seeing inventories rise across the country. As one would expect, the areas that were once the hottest like Pheonix & Austin have seen inventories go from 3900 to 16,250 & 1461 to 8758, respectively, in August (Per the St Louis FED). Locally, here in the market I advise clients, the 23 county NWMLS has seen inventories nearly double to 14,683 since one year ago, & nearly triple since the end of Q1 2022. But this increasing inventory has resulted in only a 1.8 month supply, showing just how dire the inventory was due to buyer pressure. Prices, although down since the spring / summer highs, are still up year over year. The 4 county Puget sound area has seen prices up from 5.9% to 9.2% in King & Kitsap counties, respectively. (per Northwest MLS September press release). This price resilience, in spite of the pull back from summer highs, shows how strong the market continues to be. While homes are sitting longer & Buyers are no longer begging sellers to empty the buyers bank account, properly priced homes are still selling. As buyers adjust to a new normal in their buying power, & having more choices, I predict they will continue to jump back in, albeit with a little more leverage. But, I am advising clients that Sellers are still in Charge.