Well, the Fed has now cut its benchmark interest rate 75 basis points, and yet mortgage rates have RISEN -- back up near 7% for the average 30-year fixed mortgage.
This has NOT been good news for the housing market, which has been frozen transaction-wise at record levels of unaffordability for the majority of aspiring purchasers.
It's been often asked on this program: How long can the housing market remain broken like this?
Well, we may be finding out the answer to that in real time.
In a growing number of metros, inventory is rising (substantially in many cases), prices are coming down, and long-standing real estate barons are starting to break their cardinal rule to "never sell".
Is this growing trickle of motivated sellers we're now seeing as more and more regional housing markets start to thaw likely to soon become a flood?
For answers, we're fortunate to hear today from mortgage expert and housing analyst Melody Wright.
Given the speed of rising mortgage delinquencies, she expects a big drop in average home prices in 2025, followed by several more years of declines.
Here are my key takeaways from this interview with Melody:
The housing market is at historic low activity levels. September 2023 marked the lowest levels of home sales since 1999, excluding the 2010 post-crisis slump. The combined drop in new and existing home sales is striking, particularly as it remains unadjusted for population growth. This reflects severe affordability challenges, exacerbated by rising mortgage rates nearing 7% and stagnant income growth among buyers.
Delinquency rates, which have been climbing since June, are expected to rise significantly by mid-2024. Homeowners facing increasing property taxes, insurance costs, and rate resets will likely drive a wave of distressed sales, further pressuring home prices. By June 2025, this distress is predicted to peak, leading to widespread acknowledgment of a housing correction.
Temporary rate buy-downs, heavily utilized during home purchases, are set to expire, significantly increasing costs for homeowners. This reset mirrors the adjustable-rate mortgage (ARM) crisis of 2008, with many buyers unable to refinance due to higher rates. This dynamic could lead to more delinquencies and forced sales in 2025.
Tourist and high-demand areas like Asheville, Fort Lauderdale, and parts of California are experiencing rapid inventory growth. Speculative investments, fueled by pandemic-driven demand and misuse of PPP funds, are unraveling. Short-term rental properties are being offloaded, contributing to oversaturation and steep price declines in these markets.
The housing market suffers from an ownership distribution issue rather than a true inventory shortage. Institutional investors and speculative buyers have disproportionately controlled housing supply, reducing availability for primary homeowners. This dynamic has contributed to unaffordable prices and leaves the market vulnerable to over-saturation as speculative properties flood the market.
Melody expects U.S. housing prices to likely end the year slightly negative, particularly in median listing prices and new home sales. While Case-Shiller data might be less definitive due to its exclusions (e.g., condos, repeat sales within six months), extreme price drops in certain markets suggest broader declines. She anticipates delinquencies to rise, leading to an increase in distressed sellers by mid-2024, as loan modifications will likely fail to mitigate the trend.
She predicts the most significant price drops will occur in 2025, followed by smaller, persistent declines in subsequent years. By June 2025, the market may reach a critical point where widespread acknowledgment of the downturn becomes unavoidable.
The construction industry, heavily reliant on undocumented labor, faces significant challenges under stricter immigration policies or large-scale deportations. Builders already grappling with rising costs may see reduced output, further straining housing supply. Simultaneously, builders are pivoting toward government-subsidized affordable housing initiatives to offset risks.
Housing prices in markets like Texas, Florida, and California once considered resilient, are now experiencing year-over-year declines. Even high-end markets like Newport Beach are seeing significant inventory increases and price drops, challenging the narrative that luxury and high-demand areas are immune to market pressures.
Sellers planning to offload properties in the next 12–24 months are advised to list now before prices drop further. Buyers are encouraged to wait, as current prices are unsustainable. Luxury properties, which are increasingly coming to market due to high carrying costs, exemplify the broader trend. Long-term opportunities are expected as market corrections bring more affordability by mid-2025. Buyers are also urged to research locations thoroughly, avoiding areas driven solely by external narratives.
For the full interview with Melody Wright, watch the below video:
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