Housing markets give off clues signifying where they may be headed, so real estate professionals need to pay attention to them, particularly during periods of persistent fluctuation, transition, or uncertainty. Here are three indicators that are especially worth watching over the coming months.
High Home Price Appreciation
It’s hardly a secret that home prices have increased significantly since the end of the Great Recession. From July 2009 to February 2020, home price appreciation averaged 3.1 percent nationwide, as reflected by the S&P/Case-Shiller U.S. National Home Price Index. As the COVID-19 pandemic progressed, appreciation swiftly accelerated, reaching double-digit territory in late 2020. In August 2021, it measured a whopping 19.9 percent. While such growth in home prices is unsustainable over the long-run, it poses a number of concerns about housing affordability.
For potential homebuyers, higher home prices without accompanying growth in income and wages diminish home-purchasing potential. This is especially true for low-income and first-time buyers, who are less likely to qualify for mortgage financing for higher-priced homes.
Furthermore, high home price appreciation generally translates into a subsequent increase in appraised values. This means that existing homeowners can expect to spend more on the additional costs of homeownership, including property taxes and insurance.
Inflation & Supply-Side Constraints
Inflation erodes homebuying potential in two ways: by lowering the buyer’s purchasing power and raising the costs of construction materials, such as lumber, which ultimately raises home prices.
While economists expect inflation to abate over the near-term (likely sometime in mid- to late-2022), supply-side constraints will remain a concern. The housing industry continues to face a number of challenges in siting new homes, including a lack of developable land, regulations and zoning, and increases in the costs of construction materials and labor.
These challenges limit the number of new homes that can be added each year, thereby limiting the overall inventory of homes on the market.
Potential for Higher Mortgage Interest Rates
After the Great Recession ended in July 2009, mortgage interest rates largely fluctuated between 3 and 5 percent. In the wake of the COVID-19 pandemic, they recorded all-time lows, dipping below 3 percent. Rates have since risen slightly, measuring, according to Freddie Mac, 3.09 percent the week of Oct. 21. Lower mortgage interest rates mean lower borrowing costs for homebuyers, which reduces the monthly mortgage payment. This means buyers spend less for the same-priced home.
However, as the Federal Reserve takes measures to reduce inflation, including reducing monthly bond purchases, most economists anticipate an accompanying rise in mortgage interest rates. The National Association of Realtors predicts rates will reach 3.5 percent by mid-2022. This means the mortgage payment for a home priced at $200,000 will increase from $674.57 at an interest rate of 3 percent to $718.47 at an interest rate of 3.5 percent (assuming a 30-year, fixed-rate mortgage with an 80 percent loan-to-value ratio). While such a slight increase will primarily diminish the ability of the marginal buyer (as opposed to the average buyer) to purchase a home, households may perceive the decrease in affordability to be larger than it actually is, potentially dampening overall demand.