Mortgage and Real Estate Pros are scratching their head

Has the housing market crash been canceled?

That is the question many real estate and mortgage professionals are asking after a year of housing crash predictions have failed to materialize- at least nationwide. After all home prices have remained relatively steady and even modestly increased. However, as all real estate is local, several metros are seeing significant drops in home prices.

According to data from Realtor.com active listings across the nation have jumped from 563,000 units to 734,000 from April 2023 to 2024. That’s a 30 percent increase in listings and more than double April 2022’s 380,000 listings.

If this trend continues expect to see downward pressure on home prices and a more pronounced drop in price cuts in markets where housing inventories surge above national norms. The markets to watch are those with both increases in inventory and price cuts.

However, Bankrate reports that National Association of Realtors data shows median sale prices of existing homes are near record highs. April 2024’s median of $407,600 is slightly off the all-time high of $413,800, but it’s the highest April median on record. 

All this has led many housing economists to conclude that no crash is imminent for five reasons. 1- Housing inventory remains low with a 3.5-month supply of homes recorded in April. A balanced market typically has a six-month supply of homes available. 2- Builders cannot catch up to meet demand. 3- demographics are creating a new supply of homebuyers including Millennials and Hispanics. 4- Lending standards remain strict, unlike the loose lending practices in the years leading up to the 2008 housing crash. 5- Foreclosures have not significantly spiked.

So what have the Federal Reserve’s repeated rate hikes and the subsequent doubling of the average 30-year mortgage rate accomplished? They certainly didn’t crash home values. However, they did successfully reduce the annual rate of headline inflation from a high of 9.2% in June 2022 to 3.3% in May according to the latest data from the Bureau of Labor Statistics. While the Federal Reserve’s series of hikes and higher-for-longer strategy have slowed what was once a red-hot housing market, they may have unwittingly made inflation stick above their two percent target.

However, one former White House economic advisor during the Obama administration and a housing analyst see the Fed’s higher-for-longer interest rates not as curative but rather as a serious misjudgment. In their recent Washington Post Op-Ed entitled: Note to Fed: It’s Okay to Cut Interest Rates Now former Obama economic advisor and housing expert Jim Parrott and Moody Analytics Chief Economist Mark Zandi say the Fed should declare victory on inflation and begin cutting rates.

Their rationale is that the inclusion of homeownership costs and imputed rents are not only inaccurate but are skewing the inflation index artificially boosting the real annualized rate of inflation. 

“The Fed’s aggressive hiking has worsened the tight supply in the housing market by making it harder to build new homes and by discouraging homeowners from giving up their low mortgage rates”, they write.

In conclusion despite increasing pressure from politicians and economists the Fed is likely keep rates higher for longer. This begs the question if this strategy will create unnecessary harm to the economy or if lowering rates could trigger a wave of housing inventory and falling home prices.