The housing market has been in a weird place this year. Even as mortgage rates surge, home prices have mostly continued to rise. With that said, the winds of a cooling housing market are hard to deny. Demand for homes is falling. That leaves many would-be homebuyers wondering when — or if — home prices will ease.
The real estate market is facing bottlenecks in both supply and demand. For most of the year, there has been a sort of pent-up demand for housing lingering from the start of the pandemic, when interest rates fell to near-zero. While 30-year fixed-rate mortgages have since increased considerably — currently peering over 5% — home prices have also remained questionably elevated. Some see this stubborn price growth as evidence of a housing bubble. They predict an impending crash as a result.
There are signs things are starting to cool off. Mortgage applications are falling fast. According to a recent Redfin report, home sale cancellations also reached 15% last month. That’s the highest value since the pandemic first hit. As rumors continue to swirl over a potential recession, the housing industry seems to be ripe for a correction.
Unfortunately, despite quickly deteriorating buying conditions, there are plenty of reasons for home prices to remain sticky in the immediate future.
3 Reasons the Housing Market May Not Ease
First and foremost, home prices aren’t likely to decline because of limited home construction in the United States. While interest in buying skyrocketed at the start of Covid-19, real estate construction slowed to an absolute crawl. Home builders were already constrained following the 2008 housing market crash. The pandemic only decelerated the industry even further. Add in global supply slowdowns — especially for raw materials like lumber and metals — and it’s not hard to see just how bottlenecked construction has become.
Per Redfin data, which is updated weekly, the U.S. currently has a roughly two-month supply of available homes. This is a far cry from the five-to-six month stockpile the country has typically enjoyed. Even as buying conditions worsen, if home construction doesn’t ramp up, prices are unlikely to truly fall.
Adding to these supply issues, many home owners are increasingly hesitant to sell in today’s market. Between 1987 and 2007, people lived in their homes for an average of five years. Since then, that figure has doubled to 10 years. This is largely due to the change in home quality, as well as a slight drop in average occupancy. Back in the day, homes were smaller, less comfortable and full of more people. As homes have improved, it’s no surprise people are less likely to abandon ship. That also means less homes put up for sale, contributing to the supply-demand mismatch.
The last point against a drop in home prices relates to the health of mortgage owners. Mortgage debt as a percentage of disposable income is close to its all-time low. Low interest rates and climbing real estate prices have meant mortgage owners are soaking up equity for relatively small loan payments. Credit scores are solid, meaning default rates are unlikely to see a sudden jump, which would increase the supply of homes for sale and lower prices. As home prices continue to rise, owners are less incentivized than ever to sell.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.