The U.S. housing market saw the end of an era in 2022 when pandemic-driven boomtowns defined by homeowner relocations, low mortgage rates, and tight supply resulted in stalemate after buyers and sellers reached an impasse on home values.
This mismatch in expectations has resulted in a steep decline in home sales across the country. Data from the National Association of Realtors showed existing home sales dropped to a seasonally adjusted annual rate of 4.09 million units in November, a level last seen during the recovery from the Great Recession. New home sales also fell, dropping to 640,000 units (SAAR) in November, according to the U.S. Census Bureau, a far cry from the 809,000 units (SAAR) averaged from March 2020 to March 2022.
Understanding the Market From Different Perspectives
From a buyer’s perspective, affordability has played a significant role in the pullback of home sales. Since March, the Federal Reserve has been aggressively raising interest rates to fight inflation, which remains persistent throughout the economy. These actions have caused mortgage rates to soar, more than doubling from December 2021 to December 2022. For the median-priced home in November 2022, the rise in interest rates would add close to $600 more per month.
The surge in housing prices during the pandemic has also factored into the decline in affordability. The median house price for an existing home is up 32.5% when comparing November 2022 to April 2020. A suppressed supply of homes largely drove this meteoric rise from years of under building following the Great Recession.
From a seller’s perspective, the existing home market continues to suffer from limited availability. While active listings have increased, the market is still down about 38% compared to 2019, and the rate of new listings is slowing.
The primary factor behind the inaction of suppliers is finances. Approximately 58% of homeowners have a mortgage, and 90% of these mortgages have a rate under 5%, according to data from Black Knight. With mortgage rates reaching 5% in April 2022 and remaining above this threshold since, sellers have been reluctant to enter the market; selling their current home and trading up or down would mean resetting their current mortgage at a higher level.
From a builder’s perspective, there was a push during the pandemic to get new stock to market to help absorb some of the rising demand. Housing permits and starts rose above the then equilibrium of 1.5 million units on an annual basis; however, completions continued to lag under the equilibrium due to limited availability of skilled labor and broken supply chains, delaying project schedules.