The housing market continues to defy gravity and set record high sales prices. In the past, when mortgage rates rose, home prices would decline to maintain affordability. Today, however, with so many existing homeowners locked into their existing low mortgage rates of 4% to 5% or below, there have not been sufficient incentives to move elsewhere, keeping home inventory low and prices high — for now.
There are several factors now in play which may conspire to start thawing out this semifrozen market, including the rising costs of maintenance as the climate warms; steeper property taxes, which typically track higher housing values; aging baby boomers who may not physically be able to continue living in their large, multistory suburban homes; growing families outgrowing their existing space; plus the usual forced salesthat come from death, divorce and debt.
With the national median home sales price heading toward the mid-$400,000 range in recent months, under 2.5 months of for-sale inventory in April and May tracked by Redfin, plus a stock market seemingly priced to perfection, for those on the fence and needing to make a move, now may be an opportune time to sell.
[How Climate Change Could Impact Your Home Value]
Home Maintenance Costs Soaring
Beyond higher mortgage rates and mortgage payments, a recent study by Bankrate showed that the maintenance costs for a typical single-family home — including repairs, property taxes, insurance and utilities — rose by nearly 26% between March 2020 and March 2024 to over $18,000 per year. While existing owners might feel better knowing that the median sales price rose by 40.1% during same four-year period, this increase in variable costs separate from a mortgage payment still means an additional $1,510 per month not available for other spending.
These rising variable costs are also contributing to homeownership becoming increasingly unaffordable. While it’s true that maintenance expenses as a share of total homeownership costs fell over 12 percentage points from March 2020 to March 2024 to 39.9%, that’s mostly because the cost to finance the median-priced single-family home more than doubled to $2,278 per month. Add to that monthly maintenance costs of $1,510 per month, and the total cost of ownership has risen nearly 64% over the past four years to approach $3,800 per month.
Meanwhile, although the cost of renting a typical single-family home during the same four-year period rose 16.6% to $2,236 per month, because the costs of maintenance borne by property owners rose by almost four times as much, for now renting is clearly much more affordable than owning
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In March 2020, when the cost of owning a single-family home was about 21% more than renting a comparable home, the combination of tax advantages plus building equity likely made the math work for many new homeowners. By March 2024, however, with the cost of owning almost 70% higher than renting, it’s much more difficult to justify that extra expense.
[A Home Maintenance Checklist for Every Season]
What Is a Housing Market Crash?
A housing market crash is typically defined by a rapid decline in values leading to a peak-to-trough fall of 20% or more. In the aftermath of the financial crisis of 2007-08, rising foreclosures and the lack of demand by potential buyers wishing to avoid a “falling knife” in prices continued to feed on each other, making the collapse in prices even worse.
Notably, while institutional investors purchasing single-family homes in recent years have been partially responsible for driving up home prices, back in 2012 it was their money at risk that helped stabilize the housing market. By entering the single-family rental market then — to address the surging demand by households who still needed a place to live but lacked the ability to obtain a mortgage — these investors also helped give birth to an entirely new asset class, which continues to grab a larger share of housing starts: single-family built-for-rent homes.
Today, the combination of the lock-in mortgage effect for homeowners, more millennials entering their peak earning years and population growth returning to the highest rate since 2018 will continue to add to the pent-up demand for housing — estimates of which range widely from 1.5 million to 7 million units. Regardless of the actual shortfall, as long as demand exceeds supply to this extent, a national housing crash is unlikely without a surge in job losses, a sudden decline in consumer sentiment or a sharp rise in delinquencies and foreclosures.
Housing Market Index
The U.S. News Housing Market Index is one easy way to remained informed on housing market metrics. Each month, this tool tracks a wide array of data points to provide a simple yet comprehensive way to review the health of not just the national housing market but also for over 50 metropolitan statistical areas (MSAs). The index also assigns single value points to these data points grouped by demand, supply and financial categories at the national and MSA levels.
For April 2024, although the U.S. HMI slipped 0.3 points from March to 63.8, it still rose 5.5 points year-over-year. Most of this annual improvement was due to a spike in the Demand HMI index, but both the Supply HMI and the Financial HMI also rose at lesser rates.
Over the previous year through April, the demand component of the HMI rose 15.6 points to 62.1, largely due to a strong job market, continued household growth (especially with robust immigration) and improving consumer sentiment.
The Supply HMI edged up 1.2 points to 54 year-over-year through April, due to a rise in the national rental vacancy rate slightly favoring renters, a rise in construction employment and an improving builder confidence (which dipped more recently amid higher mortgage and construction costs).
For the 12-month period ending in April 2024, the Financial HMI rose by 0.4 points to 75.2. Although mortgage rates remain high and affordability levels to a buy a home are low, a combination of higher incomes and flatter rent growth led to a slight decline in the ratio of median rents to per-capita income.
Demand HMI
The Demand HMI subindex includes government data on employment, unemployment, household growth, consumer sentiment from the University of Michigan, median home sales prices from Redfin and observed, smoothed housing rental prices from Zillow.
Employment
Even against the backdrop of interest rates continuing to be held higher by the Federal Reserve against the foe of stubborn inflation, the U.S. job market continues to defy expectations. During the 12-month period ending in April, nearly 2.8 million jobs were created, rising 1.8%. While this rate of growth has softened since December, low unemployment rates below 4% do not signal a housing market crash anytime soon. If anything, this continued job growth only adds to the pent-up demand for more housing.
Consumer Sentiment
With consumer spending making up about two-thirds of U.S. GDP, when consumers aren’t feeling confident and spending less on higher-priced items such as homes and cars, that usually impacts economic growth. If members of a household are having trouble making ends meet given the higher costs of gasoline, groceries and insurance, positive news on the health of the national economy does not make their lives easier.
Fortunately, since last hitting a low of 59.0 on a 1-100 scale in May 2023, the University of Michigan’s Index of Consumer Sentiment rebounded to 77.2 by April 2024, rising by more than 13 percentage points year-over-year. However, an early survey in June showed it slipping back to 65.5, given a combination of sticky inflation and weakening income growth.
Households
Although there is an ongoing concern that the national birth rate is below the level needed to replace or grow the population, since the end of the pandemic a sharp decline in deaths and rebounding immigration levels (both documented and undocumented) did help the country’s growth to rebound to pre-pandemic norms.
During the 12 months prior to April, Census Bureau estimates show the country adding more than 1.2 million new households, which also adds to the pent-up demand for housing — but even this figure may be too low. Recent estimates from the Congressional Budget Office calculate the annual gain in households at 1.45 million through the first quarter of 2024.
Median Sales Price & Rent Price
After last peaking at $425,000 in June 2023, the median sales price for a home in the U.S. slid to just over $400,000 in the slow months of December and January. By April, however, the median price surged to $434,000 — for an annual rise of 6.2% — and has since continued to rise even further to $440,000.
For rental households, after hitting the most recent trough of $1,965 in December, by April national rents rebounded to $1,997 per month, or up 3.6% year-over-year.
Supply HMI
The Supply HMI includes government data on housing supply, rental vacancy rates, construction costs, construction jobs, builder sentiment from the National Association of Home Builders and architectural billings from the American Institute of Architects.
Housing Supply & Rental Vacancy
Based on a formula of four to six months representing a balanced market between supply and demand, on a national level the housing market has been undersupplied since early 2019. With home inventory for sale continuing to range mostly from 2 to 3 months over the past year (and 2.3 months in April), for now a housing price crash is nowhere to be seen.
In the rental home market, a vacancy rate of about 5% generally defines the equilibrium level between a rental housing market favoring a landlord or a tenant. From the third quarter of 2023 through the first quarter of 2024, national rental vacancy rates remained unchanged at 6.6%. While some overbuilt markets with higher vacancy rates now may offer the opportunity to negotiate rent or request a period of free rent in exchange for a long-term lease, vacancies are likely to begin falling as these vacant units are absorbed.
Builder Sentiment, Construction Costs and Construction Jobs
Over the last few months prior to May, a big boost to the Supply HMI had been an increase in homebuilder confidence, which rose to 51 in April, unchanged from March but the highest since last July. By May and into June, however, higher mortgage rates, rising construction costs and a rebound in the share of builders cutting prices had sent this index down to 43. While the average price reduction in May and June remained unchanged at 6%, the share of builders using incentives rose 4 percentage points from April to June, or 61%.
The index of residential construction costs, which slipped to under 190 in February, has since rebounded to 191.0 in April and is up 4% year-over year. While construction jobs continue to rise, the annual increase through April is softer than earlier in 2024 yet still rose 2.5% year-over-year.
Financial HMI
The Financial HMI includes government data on interest rates and access to credit, delinquencies and foreclosures from Black Knight, and ratios of monthly mortgage and rental payments to per capita incomes calculated by the index. Monthly mortgage payments assume conventional financing with 20% down at the average monthly 30-year fixed rate reported by Freddie Mac.
Price to Income and Rent to Income
After last peaking at nearly 41% in October 2023, the U.S. payment ratio of buying a home with 20% down over a 30-year term to per-capita income did fall to 35.5% by January but has since rebounded to just over 39%. Notably, this ratio is significantly higher than the 19.7% level noted in March 2021 when rates were just over 3%.
For renters, after peaking at 34.4% in July and August 2023, the ratio of monthly rent to per-capita income did slip to 33.7% during the first three months of 2024. While this ratio did rise slightly to 33.9% in April, compared with the cost of homeownership it has remained much more stable.
Mortgage Interest Rates
Average mortgage rates for a traditional 30-year fixed-rate loan, which dipped as low as 2.7% in December 2020, rose to an average of 7.62% in October 2023 but by April had fallen to 6.99%. They are currently averaging just under 6.9%.
Delinquencies and Foreclosures
Due largely to the lock-in effect of mortgages with rates mostly under 5% and low unemployment levels, the number of homeowners in financial distress also remains low. National mortgage delinquencies have averaged mostly 3% to 3.5% over the last 16 months and show no signs of rising. Foreclosures also remain low. While averaging 0.40% to 0.46% in 2023, foreclosures fell to 0.37% by April.
Future Supply
New permits for single-family homes totaled nearly 93,600 in April, up 22.5% year-over-year as the nation’s homebuilders continue to take advantage of low supply of existing homes for sale. Beside the share of new homes for sale capturing 30% of total inventory — or nearly three times the historical level — more single-family built-for-rent homes are being built, especially in the South and Sunbelt markets. With affordability levels to purchase single-family homes so low, many renters are opting for single-family housing in suburban areas over traditional apartment flats.
In contrast to the single-family sector, permits for multifamily homes including apartments and condominiums fell 14.6% year-over-year though in April. That’s largely due to near-record levels of new apartments recently being completed and under construction, especially in the South. Until these new units are absorbed by tenants, levels of multifamily permits are expected to remain subdued.
What’s Next?
At the moment, with the U.S. economy among the strongest in the world and home prices pushing up again to record highs due to scarce supply, there are no signs of a housing crash anytime soon. However, should there be geopolitical events which scare off consumers or a deep recession accompanied by rising foreclosures, home prices could certainly decline.
Although the semifrozen housing market remains unhealthy due to scarce supply and challenging affordability levels, it will likely thaw out more only with the combination of more homes for sale and mortgage rates drifting much lower.
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When Will the Housing Market Crash? originally appeared on usnews.com
Update 06/25/24: This story was previously published at an earlier date and has been updated with new information.
