House Price Deceleration Doesn’t Mean House Price Depreciation

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The Federal Reserve escalated its battle against inflation This Week in Real Estate, announcing the largest interest rate hike in 28 years. Will the Feds response to inflation impact home values, ending the 122 consecutive months of home price appreciation? Despite the raise of the Feds benchmark interest rate experts are forecasting ongoing home price appreciation, just at a decelerated pace, largely due to demand continuing to outpace supply. According to Freddie Mac the U.S. housing market needs more than 3 million homes to meet buyer demand. As a result, expect deceleration, not depreciation. Below are a few newsworthy events from the third week of June that influence our business: 

Home Price Deceleration Doesn’t Mean Home Price Depreciation. For starters, you’ve probably heard home prices have skyrocketed over the past two years, but homes were actually appreciating long before that. You might be surprised to learn that home prices have climbed for 122 consecutive months. Houses have gained value consistently over the past 10 consecutive years. But since 2020, the increase has been more dramatic as home price growth accelerated. Experts are forecasting ongoing appreciation, just at a decelerated pace. In other words, prices will keep climbing, just not as fast as they have been. “In today’s housing market, demand for homes continues to outpace supply, which is keeping the pressure on house prices, so don’t expect house prices to decline,” says Mark Fleming, Chief Economist at First American. And although housing supply is starting to tick up, it’s not enough to make home prices decline because there’s still a gap between the number of homes available for sale and the volume of buyers looking to make a purchase. Experts forecast price deceleration, not depreciation. That means home prices will continue to rise, just at a slower pace.

The Great Recession Misled Millennials: It Made Them Think High Home Prices Will Eventually Come Down. History often repeats itself, but when it comes to the current housing market, don’t hold your breath. During the Great Recession, US home prices – which had soared during the housing bubble of 2006 and 2007 – tanked 33%. As some of the factors that contributed to the housing crash of 2008 reemerge, many Americans, especially millennials – the largest home buying cohort of the 2020s who witnessed their parents navigate the rocky real-estate landscape of the 2000s – are expecting a similar outcome. However, the current housing market is a vastly different beast. Although the US is bracing for a possible recession in 2023, home prices won’t be crashing anytime soon. Instead of a hard crash this time around, the real-estate market is bracing for a softer landing – and that means home prices won’t fall like they did in 2008. In 2022, housing volatility isn’t attributed to lax lending standards but instead an imbalance of housing inventory. “Demand still exceeds the supply of available homes for sale, the economy is creating jobs, and lending standards are strict. Those factors work to keep home prices from declining,” says Holden Lewis. According to Freddie Mac the US housing market currently needs more than 3 million homes to meet the demand of would-be homebuyers. “Normally, higher mortgage rates cause home prices to cool,” Nadia Evangelou, the senior economist and director of forecasting at the National Association of Realtors, told Insider. “But, I don’t expect home prices to drop in 2022. We will see slower home-price appreciation, but not a price drop.” NAR expects home prices to rise 5% by the year’s end. 

Builder Confidence Continues to Ebb as Home Buyers Feel Price Pinch. The National Association of Home Builders (NAHB) said on Wednesday that its Housing Market Index (HMI) which it co-sponsors with Wells Fargo, reflected this as it declined for the sixth straight month in June. The HMI, which measures new home builder confidence in the market for newly built single-family homes, fell 2 points month-over-month to 67. It was the lowest reading for the index since June 2020, at the height of the pandemic lockdown. “The entry-level market has been particularly affected by declines for housing affordability and builders are adopting a more cautious stance as demand softens with higher mortgage rates,” said Robert Dietz, NAHB’s chief economist. Dietz said the housing market faces challenges on both sides of the supply/demand paradigm. “Residential construction material costs are up 19 percent year-over-year with cost increases for a variety of building inputs, except for lumber, which has experienced recent declines due to a housing slowdown,” he said. “On the demand-side of the market, the increase for mortgage rates for the first half of 2022 has priced out a significant number of prospective home buyers, as reflected by the decline for the traffic measure of the HMI.

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