Two months ago, Moody’s Analytics chief economist Mark Zandi came to Fortune with a bold call: The U.S. housing market, he said, was entering into a “housing correction.” At the time, some in the real estate industry brushed it off. How fast things change. Now, many of the biggest names in real estate have adopted Zandi’s “housing correction” rhetoric.
What happened? The economic shock caused by spiking mortgage rates has pushed affordability beyond what many home shoppers can afford. Flipping from historically low mortgage rates to the highest rates since 2008, means homebuyers are finally feeling the full brunt of the record home-price appreciation that occurred during the pandemic housing boom. That has sidelined thousands of would-be buyers.
“The market is already correcting. Higher home prices and higher mortgage rates rose to the point that demand seized up in many parts of the country. Home prices are already adjusting down, and we could see that continue until consumer confidence and affordability resets,” Ali Wolf, chief economist at Zonda, tells Fortune.
Across the nation, sales of both existing homes and new homes are falling—fast. Fearing oversupply, many builders are cutting back. Or at least stopping the construction of unsold spec homes.
“It is widely understood that structurally there’s a housing shortage in America. The problem is, housing demand ebbs and flows cyclically based on factors such as consumer confidence and affordability. As demand turns down, like we are seeing today, builders will react by slowing down housing starts,” Wolf says. “Too much inventory is a problem for the wider housing market as well, whereby if builders need to cut prices, sellers in the resale market may need to cut prices as well to stay competitive.”
How will this housing correction affect home prices? We don’t exactly know yet. But we do know what to watch: Rising inventory is, arguably, the best indicator for what awaits housing. Since March, inventory levels have spiked across the country. However, that inventory spike varies greatly by market. Let’s take a look.
Among the 917 regional housing markets tracked by realtor.com, 873 saw rising inventory levels—the number of unsold listings—between March and June. Of those, 137 markets saw at least a 100% uptick. In 50 markets, including Provo, Utah (268% uptick), and Austin (260% uptick), inventory rose by over 150%.
It’s clear that regional housing markets in the Mountain West and Southwest are experiencing the swiftest slowdowns. Ironically, those markets were among the hottest spots amid the pandemic housing boom. As white-collar professionals realized COVID-19 had given them the ability to work remotely on a permanent basis, many fled cities like San Francisco and Seattle and took off for more affordable markets in places like Phoenix and Boise. That frenzy saw home prices in those Mountain West and Southwest housing markets become overvalued relative to underlying economic fundamentals.
“Many markets in the West are landlocked for one reason or another…As a result, building is more limited in these markets compared to parts of the country with less regulation and more developable land. The strong demand over the past two years drove up home prices across the country, and it appears the West hit the pricing ceiling quicker than other markets given the particular supply constraints,” Wolf tells Fortune.
While inventory levels are rising fast, they remain far below pre-pandemic levels. Indeed, among the 917 markets tracked by realtor.com, 899 have inventory below June 2019 levels. Of those, 601 markets are still at least 50% below their pre-pandemic levels. Logan Mohtashami, lead analyst at HousingWire, tells Fortune that national inventory levels would need to get above 2 million before we even start discussing the possibility of a year-over-year decline in home prices. In June, national inventory stood at 1.26 million.
Looking forward, Zandi doesn’t see a housing crash. Instead, he predicts U.S. home prices will remain unchanged over the coming 12 months, while he says significantly “overvalued” housing markets, like Boise and Charlotte, are poised to see prices fall by 5% to 10%. But that’s if a recession doesn’t occur. If a recession materializes, Zandi predicts U.S. house prices will fall by 5% nationally and by 15% to 20% in significantly overvalued housing markets.
One reason Zandi doesn’t expect a housing bust: If things begin to get too bad, the Federal Reserve could let up on monetary tightening. If that happens, buyers might get enticed back into the market by falling mortgage rates. The Fed’s goal is to slow inflation—not to crash the market.
“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again,” Fed Chair Jerome Powell told reporters last month.
Hungry for more housing data? Follow me on Twitter at @NewsLambert.
