Ask a Realtor about sky-high home prices over the past two years and you’ll hear about a slowdown for the second half of 2022. But is “slow” turning into “no go” for the nation’s residential real estate market?
No doubt, U.S. home prices are in retreat, at least on a month-to-month basis.
Existing-home sales fell for the sixth consecutive month to a seasonally adjusted annual rate of 4.81 million. Sales were down 5.9% from June and 20.2% from one year ago, according to the National Association of Realtors.
Meanwhile, while the median existing-home sales price climbed 10.8% from one year ago to $403,800, that figure is $10,000 lower than last month's record high of $413,800. Additionally, the inventory of unsold existing homes rose to 1.31 million by the end of July, or the equivalent of 3.3 months at the current monthly sales pace.
“Home prices started to decline in June 2022, with the average price at $430,000 in May and then $412,000 in June,” said Glenn Orgin, founder and CEO of Richr, a home sales platform. “The growth rate nationwide started to slow on a year-to-year basis, from 14.9% in May to 10.8% in June.”
Interest rates are the biggest factor in declining home prices, as there are few buyers for homes on the market. “There is still not enough supply to meet demand,” Orgin said. “However, market sentiment is starting to shift, giving homebuyers the upper hand in contract negotiations.”
Are Things as Bad As They Were in 2005?
With the real estate market stalling, buyers and sellers are left to wonder if the scene is heading towards 2005-2006 levels when the U.S. real estate market began a steep decline.
“What we are hearing from our lender and builder clients tracks with news reports that inventory is increasing, and sales numbers are declining,” said Peter Idziak, an attorney at the residential mortgage law firm, Polunsky Beitel Green. ‘However, I don’t see a repeat of 2005 on the horizon for two reasons.”
--- First, underwriting standards are much more robust today than they were pre-2008.
“Lenders now must make a good faith determination that a borrower has the ability to repay the loan on its permanent terms, and must verify the borrower’s income, assets, and debts,” Idziak said. “Due to these tighter underwriting standards, mortgage delinquency rates remain near record lows.”
--- Second, there was a massive oversupply of housing stock pre-2008.
“Today we still have an insufficient number of homes—especially affordable homes for first-time homebuyers—to meet the demands of a growing population,” Idziak noted. “This lack of supply relative to demand should continue to support home price growth and mitigate any decrease in prices.”
Additionally, sellers are seeing more qualified buyers than they did in the Great Recession era, and that’s a sign of hope for today’s real estate market.
“As a broker who has been through many market cycles and the Great Recession of 2008, I don’t believe the current market mirrors that one,” said Kristen Conti, broker-owner at Peacock Premier Properties.
The big differentiator is the fact that so many recent sales were cash buyers or well-qualified buyers.
“There was no predatory lending due to the Dodd-Frank Title IV Mortgage Reform and Anti-Predatory Lending Act, Conti said. “So while we have seen prices rise at an incredible pace, the buyers who purchased them are unlikely to default.”
Overall, sellers still have more leverage because private equity and hedge funds are buying and investing in homes to rent at scale.
“These homes never re-enter the market and won't be listed on the MLS as they are sold to other real estate funds,” Orgin told TheStreet. “This causes a lack of inventory for the typical homebuyer to pick from and gives the seller more leverage.”
Technology is also making it easier for home sellers to choose discount brokerages where instead of paying 6% in commission, they can offer 1% to 3% and keep more equity.
“This gives home sellers an even great advantage as the cost to sell a home is as low as it's ever been,” Orgin added.
Right now, Conti sees a market returning to normalcy, which should be welcome news to realtors and homebuyers.
“We spent a solid 18 months fighting for homes for our buyers,” Conti told TheStreet. “If the buyer needed a mortgage or wanted an inspection or an appraisal, they were out of the running. It was a brutal way to do business and took a toll on buyers and realtors alike.”
Guidance for Homebuyers Going Forward
While every buyer and seller faces a unique set of circumstances, home prices are likely to creep upward going forward, (albeit slowly) and that could impact buyer sentiment.
“If you’re looking to buy in a hot area, you’ll likely see prices continue to rise in the near term,” Idziak said. “Mortgage rates are off their late-June highs and may continue to move lower, but it’s unlikely the average 30-year fixed rate will fall anywhere close to where it was in 2021. Those factors mean that for many buyers, now is still a good time to buy.”
On the other hand, home sellers are unlikely to see their home values appreciate as quickly as they have over the last few years, while the costs of homeownership – especially property taxes – will continue to rise.
“Consequently, for sellers looking to downsize, now may be a good time to put a property on the market,” Idziak added.
Conti’s advice to sellers is to get on the market as soon as possible.
“There are still inventory shortages in many parts of the country and those will cause prices to hold for now,” she told TheStreet. “However, as builder inventories increase and buyer demand decreases, the newer homes coming to inventory will fill some of this demand and be more desirable than resale for 90% of the buyer pool.”
In Conti’s three decades in real estate, she hasn’t seen resales outperform new home sales or the prices of both so closely aligned.
Conti’s personally in the market to purchase a home, but she’s choosing to stay in the house she owns free and clear and wait things out another year.
“I feel the summer of 2023 will be a great opportunity for buyers,” she said.
