Home Prices To Moderate, But Market in 'Much Better Shape' Than Last Downturn

Surging mortgage rates continue to raise eyebrows across the economy, posing yet another hurdle for would-be homebuyers already feeling pinched by a pricey market. 

Median home prices surged 7% in the first quarter, a 38% increase over the same period in 2020, according to Marcus & Millichap. And according to Moody’s data, the lowest tier of the housing market appreciated by 17.2% in the past year alone. Meanwhile, mortgage rates are now more than 2.5% higher than recent lows.  

“I think it’s fair to say that the increase in mortgage rates, combined with the increase in prices that we’ve seen, are making homes much more expensive for buyers in the market today,” Realtor.com chief economist Danielle Hale recently told CNBC, adding that the cost of buying a median-priced home in the US is up 65% year-over-year.

“That is some sticker shock for buyers in the market, but homeowners are well qualified,” Hale said. “We expect to see home sales to continue, just at a slower pace than we’ve seen over the last couple of years.”

Justin Ages, an analyst at Berenberg Capital Markets, told CNBC there are “plenty of reasons” to say there’s still strength in the housing market, despite sales of existing home sales being down almost 9% year-over-year. In the same interview with CNBC, Ages said the market remains one of the strongest over the last 15 years.

“The question really remains: can home sales prices remain high,” Ages said. “Inventories are still low, and days on market actually ticked down from 17 to 16 so there still is strong demand. Back of the envelope math would suggest that if home prices kind of level-set where they are and they don’t grow anymore, which would be a farfetched scenario, existing home sales can fall to 5.2 and 5.1—and you’re still looking at the same gross transaction value as 2021, one of the strongest markets ever.”

The homebuilding sector also appears to be feeling the pinch, with shares of major players like DR Horton and Lennar down around 40% this year. But UBS’s John Lovallo told CNBC’s Closing Bell that the current scenario is “a whole different ball game” that in the last downturn. 

“Things are moderating, and look, it should have been fully expected,” Lovallo told CNBC. “When interest rates go up especially by this magnitude in a short period of time, there is a reset period for investors. Our view is that we’re going to moderate at a high level and that will allow the builders to have elevated earnings for quite some time.”

Lovallo also said the market is discounting the Great Financial Crisis, noting that the market is “running at half the pace we were in 2005 and the builders have twice the market share.”

Ariel Investments’ Charlie Bobrinskoy concurred, telling Closing Bell that “the market is acting like there’s a 75% chance of a recession and I think that’s a little overstated.”

“This is not the same as the Great Financial Crisis,” Bobrinskoy said. “Retail investors, homeowners are in much better shape. We don’t have the mortgage problems that we had before, so I think any kind of problems in housing will be relatively short lived.”

Research this quarter from Moody’s says that the “extreme price gains” of 2021 have led to housing prices that are 21% overvalued, and opines that climbing mortgage rates will “finally crack” housing demand. CoreLogic similarly predicts that rising mortgage rates will likely slow buyers’ demand in the near term, with annual home price appreciation predicted to slump to 5.6% by next April. By way of comparison, home prices ticked up by a total of 20.9% year-over-year in April 2022 and by 2.6% month-over-month.

“The record growth in home prices is a result of a scarcity of for-sale inventory coupled with eager buyers who want to purchase before mortgage rates go higher,” Patrick Dodd, president and CEO at CoreLogic, said recently. “Most buyers who closed on their home in April had locked in their mortgage rate in February or March when rates were lower than today. With 30-year fixed mortgage rates much higher now, we expect to see waning buyer activity because of eroding affordability. Consequently, our forecast projects slowing price growth over the coming year.”

The RCLCO Current Real Estate Market Sentiment Index, which is a 100-point scale, also slipped from the 82.1 at the end of 2021 to the current 35.1 in May.  Roughly two-thirds of those surveyed said they think real estate conditions will get “moderately” or “significantly” worse – and that sentiment, coupled with rising rates, is having a ripple effect across all sectors of residential real estate.

“For-sale housing remained in the expansionary phase of the cycle, but an increasing number of respondents indicated that this sector was reaching the peak or had already crossed over into the early downturn phase,” the most recent report breaking down last quarter’s RCLCO results said. “Rental housing was still firmly in expansion mode, but more respondents believed that this sector had moved from the early to late stable phase of the cycle indicating that the apartment sector may be approaching a peak.”