For the past six months, there has been an ongoing discussion about the housing market conditions in the US and how they compare to the subprime crisis of 2008-2009. Some suggest that as we approach a recession, housing prices could drop by as much as 30%, similar to what occurred during the previous crisis. However, it is important to note that the current market conditions are significantly healthier than those experienced back then. The dynamics of the market have evolved, with supply struggling to meet the current demand, resulting in excess demand and a shortage of approximately 6.5 million homes as of March 2023.
While I am not dismissing the possibility of adjustments in house prices, it is highly unlikely that we will see a decrease of 30% as witnessed during the 2008-2009 crisis. Instead, it is crucial to analyze the market's current state to understand the differences from the subprime crisis.
In this article, we will delve deeper into the present state of demand and supply in the US housing market and explore the factors driving its activity. Additionally, we will discuss what can be expected, considering the prevailing interest rates and economic conditions.
Over the past five years, the US housing market has experienced a period of significant activity. Low mortgage rates, a strong job market, and population growth have all contributed to increased demand for housing. As a result, home prices have been steadily rising in many regions across the US.
Several factors have fueled the demand for housing in the US. Firstly, millennials, the largest demographic group in the nation, have reached their prime homebuying years, leading to an increase in first-time homebuyers. Secondly, the COVID-19 pandemic has prompted a shift in housing preferences, with more people desiring larger homes, home offices, and outdoor spaces due to remote work and lifestyle changes.
Despite the rising demand, the US housing market faces challenges in meeting supply needs. One of the primary factors contributing to supply constraints is the limited availability of land for new construction in desirable areas. Additionally, shortages of skilled labor and increasing construction costs, including the price of building materials, have made it less economically viable for developers to initiate new projects.
The strong demand and limited supply have resulted in an increase in home prices. It is important to note that market conditions can significantly vary by region within the US. While some areas experience high demand and low inventory, others may have an excess of available homes. Factors such as job growth, population trends, and local economic conditions can influence regional disparities in housing market activity.
The rising home prices and supply shortages have raised concerns about housing affordability in the US, particularly following 2020 and 2021, when the median price of new homes rose by 14.5% compared to 2019, according to data from the US Census Bureau and the Department of Housing and Urban Development (HUD).
However, recent trends indicate a cooling off in the housing market. Housing affordability, changes in the interest rate environment, and limited credit availability have contributed to this cooling effect. Data from the National Association of Realtors (NAR) reveals a 23% decrease in annual sales compared to the previous year, with the seasonally adjusted annualized sales pace dropping from 5.57 million units to 4.28 million units in April. During the same period, sales prices also experienced a slight decrease of 1.7%.
Nevertheless, despite this cooling off, inventory remains a challenge. The current inventory of existing homes, excluding new construction, is approximately 44% lower than the 1.8 million units available in April 2019 before the pandemic. This shortage of housing supply acts as a strong dynamic that will limit price drops even in the event of a recession, where we can expect demand to weaken.
When the supply of available homes is limited, it creates a situation where there are more buyers than there are homes for sale. This supply-demand imbalance puts upward pressure on prices, even in the face of economic challenges. The scarcity of homes for sale means that buyers are willing to pay a premium to secure a property, thereby maintaining a floor on home prices. As a result, even in a recessionary environment where overall economic conditions are weaker, the housing supply shortage acts as a buffer, preventing substantial price declines.
In conclusion, the US housing market has experienced robust demand and limited supply, leading to rising home prices in many regions. Factors such as population trends, shifting preferences, and economic conditions influence the current dynamics. While we are beginning to see a cool-off in current sales prices due to factors like housing affordability, changes in the interest rate environment, and limited credit availability, the shortage of housing supply will limit price drops even as we approach a recession. The current dynamics can be seen as a shelter for the housing market, providing a strong floor for home prices and preventing significant value erosion.