Refrigerated housing market enters the big slowdown

When states issued strict lockdowns two years ago, the US housing market was sure to dip. After all, with the COVID-19 recession pushing the unemployment rate to its highest level since the Great Depression in April 2020, how not to flood residential real estate? just did not happen. By the summer of 2020, the US economy and housing market had flipped from stagnation to expansion.

Over the past two years, this housing boom has driven home prices in the US by 34.4%. That tops the biggest two-year jump in home prices (21.2%) on record in the run-up to the 2008 housing bubble. How could that happen? perfect storm. In an effort to save the economy, policymakers have used it during the pandemic with unprecedented fiscal and monetary support, including pushing mortgage rates to all-time lows. These lower rates were a very good deal for well-paid professionals who saw their jobs move to jobs far away to be missed, as they raised home values ​​in markets like Boise and Austin. They sure have competition: The pandemic coincided with a five-year window (between 2019 and 2023) when millennials born during their oldest five years of birth (between 1989 and 1993) hit the peak age for first-time home buying of 30. Off, stock market At all-time highs during most of the pandemic, investors had cash flowing and ready to be included in real estate.

But soon we could see this boom finally coming to an end.

As the data advances for April and May, it’s clear that the pandemic housing boom is cooling — fast. We are now moving to a new stage, or as luck He calls it: The Great Deceleration. Moving forward, the rapid rate of home price growth is expected to enter a period of slowdown.

“It’s clear that the housing market is in decline,” says Devin Backman, Vice President of Research at John Burns Real Estate Consulting. luck. “In some cases, buyers have completely stopped looking for a home.”

Why is the US housing market finally changing? There are three main reasons.

First, the Fed has moved into anti-inflation mode. The central bank has made it clear: slowing inflation requires a slowdown in a fiery housing market. That’s why the Fed has put upward pressure on mortgage rates, which have risen from 3.11% to 5.25% over the past five months. Higher mortgage rates are causing “demand destruction” as potential homebuyers are priced in.

Second, the frenetic spring market of 2022 pushed us over the edge into what housing economists call an overvalued housing market. Last month , luck I asked Moody’s Analytics for its proprietary analysis of US housing markets. Company data shows that 96% of regional housing markets are “overrated” and have home prices higher than local income levels can support. Simple economics suggests that home price growth (up 19.8% over the past year) cannot outpace wage growth (up 4.8% over the past year) by wide margins forever. The housing boom, aided by high mortgage rates, may have finally gone too far.

Third, the US economy is losing steam. The Fed isn’t just attacking the housing market glut: it’s also trying to slow a raging labor market. Federal Reserve Chairman Jerome Powell acknowledged that pulling inflation down is likely to require a rise in the unemployment rate. If the Great Resignation has its major slowdown, it will undoubtedly seep into the housing market. There is another thing. If a recession occurs, employers can use their increased economic leverage to force employees back into the office. And if it does, it could dry up the WFH buying spurt.

Now let’s take a closer look at the data.

View this interactive infographic on Fortune.com

The pandemic housing boom has completely crushed the housing stock. In fact, as this year’s spring market approaches, stock levels are 48% lower than pre-pandemic levels. Of course, the lack of options has given homebuyers little choice but to raise home prices by a record clip.

The good news for homebuyers? Finally, stock levels are starting to rise again. In March, Zillow.com’s inventory was 715,800 homes. That number rose to 740,000 in April. Industry insiders say luck The increase in inventories – something they expect to rise this month – points to a decline. However, as long as stocks remain well below pre-pandemic levels, there will be upward pressure on prices.

says Ali Wolfe, chief economist at Zonda, a housing market research firm luck. “This shift needs to be put into context. Housing demand has been insane for the past two years, and the shift we are seeing so far is not catastrophic. While demand has fallen, there are still more buyers than sellers due to the acute inventory shortage.”

A slight increase in inventory alone does not prove a major shift in the housing market. Historically, the housing market typically begins to see stock levels rise around this time of year as buyers get distracted at the start of the holiday season. For more proof of cooling we also need to look at sales.

View this interactive infographic on Fortune.com

On Tuesday, the US Census Bureau reported that the annual rate of new home sales fell 17% between March and April. It was also the lowest new home sales reading since the depths of the COVID-19 recession in April 2020.

The drop in new home sales isn’t just limited. This week marks the ninth week in the past three months that new mortgage applications have fallen, according to the Mortgage Bankers Association. Meanwhile, Redfin notes that the share of homes that have seen a drop in prices continues to rise while the share of homes that get multiple offers is decreasing.

“The massive increase in average monthly mortgage payments has taken some buyers out of the market and caused others to feel cold. Discretionary buyers don’t want to buy when they feel they are buying at the height of the cycle,” says Backman. “Price cuts are occurring and are likely to continue as the supply and demand metrics begin to recalibrate.”

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This story originally appeared on Fortune.com

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