Considering some of the pros and cons to the current housing market

The National Housing Survey has come out from Fannie Mae. While consumers report improved job security and healthier household finances, only 18% believe it is a good time to buy a home right now. This Fortune article explains that this is a dramatic slide in optimism from just three years ago. 

And isn't everything today the result of the pandemic? Well, while that may be an exaggeration, we did see housing demand surge, fueled by remote work, social distancing, fiscal stimulus, and low interest rates as the pandemic unfolded causing home prices to rise by more than 40% between December 2019 and May 2023.

But today, pessimism is high with 82% of consumers reporting that it’s a “bad time to buy” a home, which is a new survey high (up from 78% in June). Some of the issues we see in the current housing market include seriously low inventory, high home prices, and comparatively high mortgage rates. Together, these are leading to the highest levels of unaffordability ever seen. On top of that, recent data from mortgage buyer Freddie Mac indicated that U.S. homebuyers' monthly costs have surged nearly 20% compared to one year ago. 

Golden handcuffs? Right now you might hear this term frequently as sellers continue to sit on the sidelines, holding on to low mortgage rates and feeling handcuffed by the current situation. Homeowners that choose to sell their homes and buy something new, would likely be giving up their 2% to 3% mortgage rate and taking on something in the 6% to 7% ballpark. That potential mortgage rate payment shock is just too pricey for many would-be move-up buyers to stomach. Even homeowners that want to move feel like they can’t because they’re trapped by their low mortgage rates that were once considered a financial win. This Fortune article gives a great example to the impact of these mortgage rate increases:

If a borrower were to take on a $500,000 mortgage at a 3% interest rate, they would owe a monthly $2,108 principal and interest payment over the course of the 30-year loan. However, at a 7% mortgage rate, that payment would be $3,327 per month.

And for every homeowner that decides not to list their home, that is one less home buyer.

Recent surveying from Lending Tree shared that:

• 51% of respondents who don’t own a home say they’re worried they never will. Among those who want to own one day, 49% say they can’t afford a down payment and 40% say home prices are too high in their area. Student loan debt weighs heaviest on millennials, with 19% citing it as a roadblock to homeownership.

Things are so challenging for first-time home buyers, that a new Realtor.com survey shared that 85% of couples who created a wedding registry in the last two years said they would have preferred to receive cash toward a down payment on a house rather than a standard registry gift that will collect dust in the imaginary house they can’t afford. If given the option to redo their registry, 80% would have created a category for housing assistance.

So what are the pros in this current housing market? While this market continues to correct, there has been a few things that are more on the positive side. Home values have held steady even as mortgage rates topped 7 percent and they probably won't drop much for a period of time as the housing supply needs to increase. And most expect the market correction to be modest, not like the Great Recession and no housing crash is coming. 

So what's coming? Here are 4 things to ponder and take into consideration moving ahead:

1. Mortgage rates: Per U.S. News, as of early August, mortgage rates are nearly 7%. As a baseline scenario, the 30-year fixed mortgage rate is expected to stay above 6% through the remainder of 2023, with a slim chance that rates will fall below that threshold by year-end. That’s due in part to the Federal Reserve’s hawkish monetary policy, with recent interest rate hikes essentially putting a floor under mortgage rates. In other words, rates may not rise meaningfully in the coming months, but they’re not likely to fall dramatically, either.
2. Inventory:  Existing home inventory is expected to remain low for quite some time as more than 80% of home shoppers looking to buy and sell feel locked in to their current rates, according to a Realtor.com report. New home builds are on the rise, but this will take some time to have an impact.
3. Home prices will continue to rise: While they may not rise as quickly as they have the last couple of years, the biggest reason that home prices will stay up is lack of inventory. 60% of the nation’s 221 largest metro areas posted gains, according to a newly released report from the National Association of REALTORS® and Zillow projects that home values will grow by 3.9% in 2023. However, there are a few places where home prices dropped year-over-year: Austin, TX dropped 19.1%, San Francisco, CA dropped 11.3%, Salt Lake City, UT dropped 9.6%, and Las Vegas, NV dropped 7.4%.
4. The Midwest will be most affordable area: Have a look at the Summer Emerging Housing Markets Index and you'll see why. Indiana, Illinois, South Dakota, Ohio, Michigan, Wisconsin, and Minnesota take up many of the top emerging locations primarily because they offer lower cost of living.