12/26/2022
GETTING BACK TO NORMAL?
Historically, the housing industry has been just below 16% of the overall economy, only moving significantly above that during the last housing crisis and during the past two years during the global pandemic. And after two years of housing being an oversized portion of the business cycle, it is returning to a more normal level.
This also explains why home sales are slowing down and yet not crashing, as the industry returns to a more normal pre-COVID level.
Because by all standards, the market is healthy, and slowing is more of a correction than a crash. The most important indicator is inventory, which remains at levels between the past 2 years and below any period pre-COVID.
And as much as the increase in mortgage rates has slowed the housing market, it has caused at most a slowing or a correction. John Burns Real Estate Consulting states the doubling of interest rates has reduced the pool of buyers by 40%. But remember, when rates were at 3%, we had 10 or more offers per property. Reducing the population by 40% merely takes an overheated market to a historically average market. In fact, Redfin reports that the bidding war went from as high as 70%! of all properties down to "only" 40% last month.
So, if rates went up, how are sales not collapsing? Well, 2 groups are increasing their activity despite the rates.
One is cash buyers. The higher rates are wreaking havoc on stocks, so investors are looking for returns and paying cash for properties to improve their yields. The share of cash buyers closed at almost 32% of sales, the highest since 2014.
Another group taking advance of the increased rates are first-time buyers and those using FHA loans. During the red-hot COVID period, many sellers were unwilling to consider FHA loans due to their increased condition requirements as well as tighter loan underwriting. Now, with a more normal level of activity, sellers are able to review all offers, including FHA buyers, and as a result FHA loans increase to their pre-COVID levels.
So, the market looks like many factors are helping the overall industry return to normal, pre-COVID levels.
