The housing market has been going crazy over the last few years, and for a while, it seemed like there was no end in sight — but prices may finally be starting to decline.
The U.S. Census Bureau released a report in May revealing that sales of new homes dropped 16.6% between March and April 2022 — and a whopping 26.9% since April 2021.
The number of sales has reached its lowest point since the pandemic’s start.
But does this mean we now know the direction of prices and can expect may be not a housing market crash but at least, a trend of lower housing market prices? Let’s take a look at the evidence.
What the Report Says About Housing Market Sales
There have been several reports recently offering conflicting data on the direction of housing market prices; A Zillow report indicated higher prices while a report from CoreLogic suggested lower prices. The latter is in line with the U.S. Census Bureau and the Department of Housing and Urban Development report.
This is a monthly joint report on the sales of new single-family houses each month. The latest notes that 591,000 new homes were sold in April 2022 — compared to 809,000 in March 2022 and 809,000 in April 2021.
The lowest number in sales previous to this was in April 2020, when the pandemic first hit — so this report represents a significant decline.
Meanwhile, there were 444,000 new houses listed for sale. At current sales rates, the report estimates that the market contains a supply of homes that could last nine months, which is a healthy amount to go around all buyers for a while.
These numbers are all seasonally adjusted to account for the fact that interest in houses tends to rise as we approach the summer. The adjustment allows us to compare the rate with other times of the year.
However, this isn’t the first time we’ve seen declining sales in 2022.
This trend continued for four months since January, which is when mortgages started to become more expensive. Let’s take a closer look at what all this means.
What the Drop Means
While the housing market has been on fire over the last couple of years, we’ve also remained firmly within a seller’s market.
The housing bubble we’re witnessing means more prospective buyers are looking for homes than houses on the market, which gives sellers much more influence on prices.
We experienced this over the pandemic, which is why we saw buyers competing with each other to secure the limited supply of homes and willing to make offers above the asking price.
But now that fewer houses are selling, it suggests many buyers may be less keen to buy homes, which could give supply a chance to recover and shift conditions toward a buyer’s market.
A buyers market allows buyers can offer below the asking price for homes and stand a chance of acceptance because of greater competition between sellers.
House Prices and the Economy
The trends outlined above are due to economic uncertainty, especially fears about interest rates and inflation. The cost of borrowing and taking out a mortgage is now higher than before, making many buyers reluctant to purchase a home due to the greater monthly payments.
For instance, the Market Composite Index (which records mortgage purchase applications) dropped 1.2%, suggesting buyers are less keen to purchase houses now.
Meanwhile, the average rate for a 30-year fixed-rate mortgage is now 5.25%, compared to 3.11% in January — an increase of almost 70%.
Also, economic struggles have led many to wonder if a crash could be on the way, which may be making many would-be buyers decide to wait things out.
Nobody wants to risk buying a house when houses are declining; they’d risk ending up with negative equity and a high mortgage interest rate.
Considering further Federal Reserve rate increases are expected, this is a possible outcome.
What’s Happening to House Prices?
For most potential buyers, the quantity of house sales is a less critical metric compared to something else: House prices.
The median sales price for April was $450,600, while the average sales price was $570,300. While these numbers represent all-time highs, the figures aren’t seasonally adjusted.
We typically expect house prices to pick up as summer comes, meaning that the growth could be due to seasonality doing its thing.
Yet while the theory suggests that a drop in sales should eventually reduce prices due to economic forces, the road to market equilibrium doesn’t always run so smoothly.
Although the demand is cooling, some of the factors that pushed prices high previously haven’t disappeared.
Supply chain issues and the prices of building materials are still an issue, meaning that builders may be reluctant (or simply unable) to reduce their prices too much.
Considering new home sales make up around 10% of all housing market prices, this could impact the figures we should expect.
In relative terms, house sellers still ask for a lot of money.
Due to the factors at play pulling the market in different directions, the most likely outcome seems to be that house prices may stop increasing so dramatically.
But they may slow down, stabilize, or decrease slightly rather than us seeing a complete crash.
A Turning Point?
The drop in housing market sales and ample housing inventory marks a stark difference from what we’ve seen in the housing market over the last two years.
With the inventory of houses finally increasing and buyers holding back instead of competing, we may finally be on the brink of a market slowdown or stabilization.
However, now more than ever, making predictions is a dangerous game.
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Learn how to diversify and hedge your long-only stock portfolio. Sign up for a free insight into the Swing Trading 101 program developed over thousands of hours of trading over hundreds of thousands of dollars across stock, commodities, options, and cryptocurrencies. It’s designed to empower you to take a unique but strategic approach to the markets. Learn more about swing trading.
Tim Thomas has a real estate portfolio.
This was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Unsplash.