Is The Housing Recession Over? 

The housing market landscape has undergone a significant shift but the housing recession is over, according to chief economist for NAR Lawrence Young. This announcement raises interesting questions about the factors contributing to this turnaround and the potential implications for both buyers and sellers. In this article, we'll delve into the evidence supporting this claim, exploring key indicators like rising home prices, builder confidence, and changing interest rates. Additionally, we'll address the influence of commercial real estate trends on the residential sector and provide insights into what the near future might hold for the housing market. Whether you're a first-time homebuyer or a seasoned investor, understanding these dynamics could greatly inform your decisions to help decide if it’s the perfect time to buy or sell your home in Huntsville, Alabama.

Why the Housing Recession is Over

One piece of evidence that supports the end of the recession for the housing market is that the median sales price for homes across the US was at the second-highest level it has ever been in the month of June. This points towards continued price appreciation, even in the face of the higher interest rates we've witnessed all summer long. If we do experience a pause with the Fed in terms of interest rates, or even if we see interest rates drop, we may start to observe accelerated price appreciation once again.

Another piece of evidence supporting the end of the housing recession is the fact that NAR's pending home index rose by 2.3% in June. This index tracks homes that are under contract and are about to close within the next 30 to 60 days. With this number on the rise, it points towards increased sales, which may also lead to higher prices over the next couple of months. Not only has the pending home sales index gone up, but multiple offers are also on the rise. This isn't only true here in the Huntsville market, but it's a trend seen across the US as well. While it might not have reached the levels of 2020 or 2021, it's truly amazing that we're witnessing an increase in multiple offers again, especially during a period when interest rates have peaked over the summer.

Multiple Offers & Interest Rates

If we're observing multiple offers at these interest rates, and if interest rates have possibly even peaked, the likelihood of seeing an increase in multiple offers as interest rates start to come down in six months or two years is high. Why is that? Simply because we don't have enough supply. There's pent-up demand waiting on the sidelines, and the home deficit has grown since the last Great Recession of 2008. Since the recession, we started constructing fewer homes, and ongoing family formations have contributed to this 6 million home deficit. It took well over a decade for us to reach this point, and it will take at least a decade or even longer to address this deficit through new construction. Therefore, with interest rates at their current peak and multiple offers making a comeback, it's a significant indicator that we might have potentially reached the bottom in terms of the housing recession.

Multiple offers are returning to the marketplace just as interest rates may be starting to peak. The Consumer Price Index data for June showed a 3% increase compared to 9.1% in June of 2022. As a result, the Fed is significantly addressing inflation, getting closer to their target of 2%. They recently raised their overnight rates by another quarter point, but they hinted that this could potentially be their last rate increase or there might be just one more additional rate hike. Afterward, they might maintain their current rates for a while to allow inflation to settle and cool off. This 3% figure represents a 12-month rolling data so it's going to take a little bit of time for it to continue to get down to that 2% level.

With the uncertainty surrounding future rate hikes, there has been a considerable amount of fear and uncertainty integrated into the 30-year mortgage market, mainly because it isn't directly tied to the Fed's overnight rate. Instead, it's closely connected to the 10-year treasury yield and typically maintains a certain percentage point difference above that 10-year Treasury rate. Historically, this difference has often been an additional 1%. As the market sees the Fed may stop raising rates and they're actually going to pause and at some point lower rates once again, it's not going to take us long from going to a 7% rate to potentially a 5.5% rate because of the 1% being baked in.

If we experience just one or two rate cuts by the Fed, we could potentially return to that 5.5% rate once again. And why is this rate so crucial? Because we're already in a multiple-offer situation. The last time we had rates at 5.5%, there was a significant increase in multiple offers, and numerous homes were selling above their list price and at a fast pace. If we reach the 5.5% level once more, we might find ourselves in another inflationary environment.

Builder Confidence Continues to Rise

Another statistic that indicates the end of the housing recession is the continuous rise in builder confidence. It has increased for the past seven consecutive months and currently stands at a level of 56. Builders are currently making efforts to hire more employees in order to enhance their production and increase inventory. On a local level, I want to commend our builders for doing an exceptional job in creating affordable housing for the Huntsville market.

Commercial Real Estate Affecting Residential Sales

Nationwide sales were down 30% in 2022, and they have been down 10% year-to-date in 2023. However, the July numbers, thus far, appear to deviate from this declining trend in 2023. In our real estate company alone, we observed a 40% increase in both sales and new listings during July. It seems that we might have reached the lowest point in terms of the number of homes sold, and there's also an increase in additional inventory as it recovers from the decline, contributing to the revival of the local housing market.

Now, while we've primarily concentrated on the recession in the residential real estate housing sector, one factor that could impact the recovery of residential real estate is its counterpart: commercial real estate. Commercial real estate is actually just now starting to go into a recession and is likely to be a long, drawn-out recession that could last several years. The underlying cause for this extended period is that interest rates for commercial loans operate differently than those in the residential sphere.

Commercial real estate loans typically function on five- and seven-year ARM rates. A substantial number of these five- and seven-year ARMs are scheduled for renewal between 2023, 2024, and 2025. As we’ve covered, the challenge is many people are not working in office buildings and do not need as much office space as they once did primarily due to the impacts of COVID and the prevalence of remote work.. There's just simply too much office space out there in the marketplace right now.

Commercial values have decreased, while interest rates are on the rise. As a result, cash flow is not only diminishing, but it's also turning negative for many investors involved in commercial properties, including apartment complexes. This situation poses a significant challenge for these investors, and it's likely to have a cascading effect on the banking sector. If local banks are compelled to tighten their lending criteria for borrowers, this could potentially spill over into the residential sector, impacting affordability and hindering first-time homebuyers, as well as some of the first-time homebuyer programs aimed at assisting buyers in entering this market.

Matt’s Housing Predictions

Here’s what I think prices are going to do in the residential sector in terms of the remainder of 2023 and going into 2024. It is going to depend on what interest rates do, personally, I think interest rates have likely peaked around the 7% level. However, if the Fed continues raising rates and there's increased fear and uncertainty in the marketplace and we hit that 8% level, then you could see prices stay flat and even decline in this market because 8% is really going to be another key level.

We observed that when interest rates reached 6% and even 7%, it took buyers a while to adjust to those levels. Consequently, we began to witness price declines in certain parts of the country. I believe you'll see a similar pattern if interest rates climb to the 8% threshold. However, I don't believe we'll actually reach that 8% level. My expectation is that we'll likely hang around the 7% mark. I have a feeling the Fed will put a hold on their rate hikes for now. I don't expect us to go beyond 7%.

I honestly believe that 7% could drop into the mid-6% range, and even down to 6%. If we remove the fear and uncertainty from interest rates, it wouldn't require much to bring those 30-year rates back down. Should rates remain around 7% or in the high 6% range, I think home prices will maintain a relatively steady course, experiencing normal appreciation levels, around 5%.

Now, I think the point that might worry you as a buyer is if interest rates fall back to the mid-5% levels. The last time we were at those mid-5% levels, given the limited supply and the high demand in the market, we experienced a buyer frenzy. Homes were being bid up, multiple offers were common, and properties were selling rapidly. I'm confident that we'll witness a similar situation again at 5.5%. The question remains: is the Fed aware of this trend, and will they try to steer us away from reaching those 5.5% interest rates? Looking ahead, I believe we could hit the 5.5% mark within the next 12 to 18, or perhaps even 24 months. And when we do hit that 5.5% interest rate, which I foresee as a possibility, we might see double-digit appreciation once again, not only in the local market but across the entire US.

Posted by Matt Curtis on


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