By Tim Courtney, CIO Exencial Wealth Advisors

Last year we saw bubbles that had been inflating for years finally burst (cryptocurrency, NFTS, meme stocks, unprofitable venture capital startups, etc.). These assets had attracted large amounts of capital, but the economic ripple effects caused by their eye-popping price declines have been minor. The housing market ran quite hot alongside these assets during their ascent (home prices soared more than 20 percent in 2021¹), so some fear housing is also due for a meaningful decline. Many remember the 2008 housing crash when home prices plummeted nearly 20 percent from their peak and 3.8 million Americans saw their homes foreclosed.²

Since in many cases a home makes up the lion’s share of a household’s net worth, and is by far a larger market than the assets noted above, the economic ripple effect of severe home price declines would not be minor. This would affect consumer confidence, spending plans and investment decisions. So will 2008’s meltdown repeat itself?

The Rise

An unprecedented series of events pushed housing prices sky-high over the last few years. When the pandemic hit, interest rates were near zero and stayed there as stimulus bills pumped nearly free capital into the economy. People flocked to the real estate market and existing home prices soared 45 percent between December 2019 and June 2022.³ Houses were selling sight unseen and bidding wars led to offers well above asking price. And it wasn’t just individuals – almost a quarter of all single-family home sales in 2021 were to investors.⁴ As home prices ballooned, those who were forced out of the market had to rent, which was moving higher as well.

The Slowdown

In March of 2022, as inflation soared, the Federal Reserve finally began a series of interest rate hikes which continue to this day. As a result, mortgage rates began to rise and in June of 2022 home prices in some areas started to decline. By December, home prices were up just 6.9% from 12 months prior, the smallest year-over-year increase since the pandemic began.⁵ This is still higher than what is ideal, but the higher mortgage rates were doing their job of reining in prices.

The Future

We still have very little slack in the country’s housing stock. In addition, we may not see as many people willing to sell their homes after having locked in a 2.5% mortgage and knowing a new purchase will result in a 7% mortgage. This should keep home prices from falling precipitously and will likely maintain much of the price gains made since 2019. Rates have fallen slightly, and the market expects lower rates later this year and next. This could also help demand. Materials and labor inflation will also keep prices from falling precipitously. Overall, it looks like we are in for a cooldown rather than a burst bubble. That is good as far as it helps households’ confidence levels.

If you have questions, please contact your Exencial Advisor.

Sources:

1. Fortune (1/28/22) — Home price growth decelerates again—forecast models say the peak rate is behind us
2. Investopedia (9/18/22) — The 2007–2008 financial crisis in review
3. The New York Times (11/4/22) — The housing market is worse than you think
4. Bloomberg (9/8/22) — How the ‘rise of the rest’ became the ‘rise of the rents’
5. CNBC.com (2/10/23) — Here’s what’s happening with home prices as mortgage rates fall

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