The housing market came to an abrupt halt for the second time this century.  The first shock to housing was following the 2008 Great Recession when existing home sales plummeted from a record 7.25 million annual sales in September 2005 to its lowest volume of 3.68 million by August 2010. 

The second shock was when the Federal Reserve began its campaign against inflation in 2022.  Beginning in March 2022, the Federal Reserve raised its discount rate by nearly 500% with 11 consecutive increases that ended after their July 2023 meeting.  The interest rate for 30-year fixed-rate mortgages soared from a low 3% in 2021 to nearly 8% by October 2023. 

The two-fold punch of rising mortgage interest rates and home price increases following the 2020 pandemic significantly increased the cost of homeownership. Below is a chart from Don’t Quite Your Day Job (DQYDJ) that illustrates the significant rise of median home prices (red line) and the abrupt decline of home affordability based on historical household income (HHI) that began in 2022 (green line).  An affordable rate of 1.00 or below means homes are affordable for that income bracket and above 1.00 is reducing the affordability. 

As a result, existing home sales plummeted from 6.34 million annualized sales in January 2022 to 3.84 million annualized sales by October 2023.  Last month the annualized rate of existing home sales dropped again to 3.84 million, the lowest volume not seen since October 2010 following the Great Recession.  This past September there were 1.39 million homes for sale which is the most since October 2020.

Chief Economist Lawrence Yun of the National Association of Realtors spoke in Boston last month and was quoted saying:

• "Home sales [existing] have been essentially stuck at around a four-million-unit pace for the past 12 months, but factors usually associated with higher home sales are developing. There are more inventory choices for consumers, lower mortgage rates than a year ago, and continued job additions to the economy".

The new home sales market has performed better than existing home sales primarily due to favorable financing offered directly by developers.  You can see from the chart below that new home sales volume also plummeted after the Great Recession, but the industry has nearly recovered to pre-pandemic levels.

The U.S. Census Bureau reported the following in September:

• “Sales of new single-family homes in the United States jumped 4.1% to a seasonally adjusted annual rate of 738,000 in September 2024, the highest level since May 2023, following a downwardly revised 709,000 in August and above forecasts of 720,000. Sales soared 21.7% to 28,000 in the Northeast and were up 5.8% to 477,000 in the South, but fell 2.5% to 77,000 in the Midwest and steadied at 156,000 in the West. The median price of new houses sold in the period was $426,300, while the average sales price was $501,000, compared to $426,100 and $515,000 respectively a year earlier. Meanwhile, there were 470,000 new homes listed for sale during the period, representing about 7.6 months of supply at the latest sales rate.”

A strong housing market is when the housing supply is around 3-4 months. Typically, home prices rise as supply increases and vice versa.  Based on the details outlined above, the housing market is still sputtering at the lowest levels not seen since the Great Recession. 

Experienced investors know that when an industry has been struggling it is approaching new buying opportunities.  This may be especially true should the Federal Reserve continue to reduce interest rates into 2025.  Lower interest rates increase the affordability of homes and increase the qualified buyer population.  Along with the potential of improving affordability, the supply of new construction homes is rising as developers are initiating new development projects.  The potential to increase the number of new qualified buyers is the combination of lower interest rates and expanding supply that may keep home prices stable.

According to the U.S. Census Bureau, new construction starts of single-family homes rose by 2.7%, in September equivalent to an annualized rate of 1.027 million.  Reaching 1 million new homes annually is a key for the housing industry as this is typically the number of new homes needed to meet historical buyer demand.  The Bureau stated in its report,

• “Among different geographical regions, starts fell in the south (-3.4% to 738 thousand), the West (-10.1% to 257 thousand), and the Midwest (-9.1% to 179 thousand). On the other hand, housing starts rose sharply in the Northeast (57.9% to 180 thousand)”.

It is interesting that the greatest increase in recent housing starts is in the Northeast.  I thought everyone was leaving New York for Florida.

What Does This Mean to Me?

Homeownership has become a key to building wealth in America for the past 40 years.  Those who were fortunate enough to buy a home years ago have been able to benefit from the rise in home prices to use their equity to buy a more desirable home or invest in their own home. 

Lawrence Yun was quoted in his same speech in Boston,

• “Household equity in real estate is at a record high. This means there has been a huge increase in wealth for Realtors®’ past clients, to the tune of $35 trillion. Mr. Yun highlighted the glaring difference in estimated median net worth between homeowners ($415,000) and renters ($10,000) in 2024. 
  
  Homeowners’ wealth steadily rises while renters’ wealth does not.  If you don’t enter the housing market, you are in the renter class where wealth is not being accumulated. If you want to participate in the housing market, the sooner you get in, the sooner you accumulate wealth.
  
  Mr. Yun also highlighted that the homeownership rate is much lower among younger Americans, and first-time home buyers are having trouble entering the market.”

Mr. Yun projects a 9% increase in home sales in 2025, a 13% increase in 2026, and 30-year fixed-rate mortgages to stabilize near 6%.

I understand why the lowest homeownership is among the younger Americans as house prices have soared for the past 14 years since the Great Recession.  It is hard to enter an already expensive market that keeps increasing costs.  However, an opportunity may develop in the coming year or more in single-family homes.  I don’t project much of a decline in home prices in 2025.  However, stable home prices and cost of living while wages are rising increase one’s buying power.  Home buying in 2025 may still be challenging but a small improvement will help buyers, especially first-time buyers. 

It may also be a good opportunity for investors looking to buy rental property in the single-family market.  For those of us with sub-3 % fixed mortgages, it will be difficult to be excited about investor rates of 6% rates or higher (typically rates for investors are higher than for owner-occupants).

As in any investment, research and monitoring will reveal when and where to buy your next or first home. 

Give us a call if you have any questions about this update or about your wealth-building strategy.  We welcome the opportunity to assist you and your family in achieving your goals.