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colorful letters selling JULY int the sand on the beach surrounded by seashells

Let’s begin this month with the topic of economic slowdown. According to The Wall Street Journal, recession fear surged among CEOs. Three-quarters of global CEOs say that we are in a recession or will be in the next 12 to 18 months. A recession is typically two consecutive quarters of negative GDP. We saw negative GDP in the first quarter of this year, and forecasts coming out of the Atlanta Fed predict an extremely low negative GDP in the second quarter.

Throughout history, during a recessionary period, interest rates go up at the beginning of the recession. But in order to come out of a recession, interest rates are lowered to stimulate the economy moving forward. Historically, we have seen a repeated uptick in interest rates followed by lowered interest rates.  Mortgage Specialist
Let’s look at prior recessionary periods, going all the way back to the early seventies. And this outlines in blue there, the graph mark, there the 30-year fixed interest rate. And then the boxes there that are highlighted in yellow are recessionary periods. This is what typically interest rates have looked like in a recessionary period. I’m going to give you another look at it here in just a minute, but I think it starts to bring this perspective and certainly here on the other end, the rise in interest rates that we’ve seen more recently here in the first six months of this year. But if we break this down and sort of convert it to a table versus this visual chart, so I’m going to use the visual chart, but then I want to break it down by this table right here and say, okay, in each recession that we’ve had in this country going back to the early 80s, what has happened to the mortgage interest rate? And so this gives you that from when it actually happened, how long it happened, and what was the starting interest rate and what did it fall to. And there’s one thing that every one of these recessions has in common and it’s that in each instance, mortgage rates fell.   http://www.freddiemac.com/pmms/ https://mtg-specialists.com/2022/05/11/recession-interest-rates-and-real-estate/

Looking at the mortgage rates in prior recessionary periods going all the way back to the early seventies, we can see that in every recession mortgage rates fell.

Over the past five recession, mortgage rates have fallen an average of 1.8 percentage points from the peak seen during the recession to the trough. And in many cases they continue to fall after the fact, as it takes some time to turn things around, even when the recession is technically over.   https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://mtg-specialists.com/2022/05/11/recession-interest-rates-and-real-estate/

Over the past five recessions, mortgage rates have fallen an average of 1.8 percentage points from the peak to the trough. Right now, the Fed is raising the funds rate to tame inflation, and in order to do that they have to slow down the economy. You may have heard of the Fed trying to engineer a “soft landing” in which growth is positive and moderate. If a soft landing is not engineered, then you end in recession – a likely outcome at this point.

 that recession doesn’t equal a housing crisis. And this is the survey that goes back to the early eighties and says what happened to housing prices? We just looked at interest rates. What happened to housing prices? Four out of the six times we were in a recession, homes appreciated. Two times they fell. Once, marginally in the early nineties and the other time was in 2008. The thing I would say here is ever since 2008, the word recession has taken on a new meaning for people and for very good reason. There are a lot of people that were hurt, a lot of people who were impacted, a lot of people who saw family members that were hurt. During the 2008 recession our business was at the epicenter and any of us that were in the business certainly remember that and certainly remember the times that we went through during that.  https://www.corelogic.com/blog/2019/03/housing-recessions-and-recoveries.aspx https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011 https://www.corelogic.com/intelligence/find-stories/corelogic-hpi-posted-record-year-over-year-growth-in-2021/

Here is where it is important to remember that a recession does not equal a housing crisis. Four out of the last six times we were in a recession, homes appreciated in value. The two times they fell – marginally (1.9%) in the early nineties and in 2008 (an outlier due to lax lending standards).

There has been a pickup in the inventory that we've seen recently, but it's not from a big increase in new listings... but rather a slowdown in the pace of sales. And remember that months’ supply measures the inventory of sale relative to the pace of sales. Same inventory, fewer sales, means more months’ supply.  Mark Fleming, Chief Economist, First American

Delving into an update on housing inventory, we are seeing the average number of offers received on a home for sale decline. We saw 5.5 offers in April, which decreased to 5, and then 4.2 in June. The rising mortgage rate environment is starting to soften demand. But, keep in mind, at an average of 4.2 offers on homes for sale, we are still well above the pre-pandemic norm, suggesting the market is still very competitive.

Over asking price offers are also declining, from 61% of offers over the asking price last month to now 55%. Not a huge decline, but certainly a softening or a moderation. All of this leading to a slower pace of sales and rising inventory levels – same inventory with fewer sales means more month supply.

So we know that the month supply of inventory of homes is increasing. It was record low in January of this year at 1.6 months and we’ve ticked up the latest data showing us 2.6 months of inventory. Now, that’s not a huge increase, but it certainly means more options for buyers when there’s more inventory on the market. Now remember, a balanced market, however, is six months of inventory and we haven’t seen that since 2012. So we’re nowhere out of the woods on where we need to be with inventory to meet that balance market but we’re certainly moving in the right direction.   https://www.nar.realtor/topics/existing-home-sales https://www.nar.realtor/newsroom/existing-home-sales-fell-3-4-in-may-median-sales-price-surpasses-400000-for-the-first-time

The months supply of inventory was at a record low in January at 1.6 months, and the latest data is showing us at 2.6 months of inventory, so there are more options for buyers. Remember that a balanced market is six months of inventory – a number we haven’t seen since 2012.

new monthly listing counts are increasing. That’s what you can see here from Realtor.com. So more new inventory, more new listings coming to the market this year, and they’re ticking up at a faster pace. So April to May, that’s increasing at a faster pace than we did last year at that time. So that’s huge. That means that there are more new listings coming to the market for buyers and there are more options available. But what’s happening at the same time, and this is what you heard in that quote from Mark Fleming, is that the pace of sales is slowing.  https://www.realtor.com/research/data/

New monthly listing counts are also increasing. More new listings are coming to market than last year and they are increasing at a faster pace.

So this is the existing home sales, seasonally adjusted annual rate from NAR. we are projected to end the year at 5.4 million home sales by the end of 2022 if we continue at the pace we’re selling homes today. Now, we know that that pace has softened because of rising rates, economic pressures, inflationary pressures, all the things that are impacting the housing market right now. So the pace of sales is slowing. And when you compare that to last year and the year before, we have to remember that it’s slower than then because those are absolutely incredible years. They were an anomaly in the housing market. But where we are today in that green bar is returning more towards the direction of those pre-pandemic years, the 2018, 2019, and we have to remember that those were great years in real estate. So when we think about this contextually, yes, the pace of sales is slowing, but we’re slowing back to the pre-pandemic years, which were fantastic years for the housing market.   https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales https://www.nar.realtor/newsroom/existing-home-sales-retract-2-4-in-april

We are projected to end the year at 5.4 million home sales by the end of 2022 if we continue at the pace we’re selling homes today, but we know that the pace of sales in slowing due to rising rates, economic pressures, and inflationary pressures. Definitely slower than the past two years, which were incredible years for real estate and an anomaly in the housing market. So we see the return to those pre-pandemic years, which were great years in real estate.

Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance.  Lawrence Yun, Chief Economist, NAR
Active inventory continued to grow, rising 21% above one year ago... In other words, we’re starting to add more options, but the market needs even more before home shoppers have a selection that’s roughly equivalent to the pre-pandemic housing market. Danielle Hale, Chief Economist, Realtor.com

We still have far more buyers than we have sellers, which is continuing to put upward pressure on prices.

And what it shows us is that at the beginning of the year, realtor.com projected that we would have a 0.3% increase in inventory, so very small. They have re-forecasted for the rest of the year a 15% increase in inventory. A lot of that largely has to do with the softening or the slowing in the pace of sales and that uptick in new listings. So more inventory coming to the market. They’re seeing more in the projections. That’s going to create options for buyers.  https://news.move.com/2022-06-13-Realtor-com-R-2022-Forecast-Update-Real-Estate-Gets-a-Refresh-from-the-Frenzy

realtor.com’s originally projection for this year was a 0.3% increase in inventory. They have re-forecasted for the rest of the year a 15% increase in inventory – an increase likely representative of the slowing in the pace of sales and an uptick in new listings. Typically, a one month increase in supply translates to a 3% decline in annualized house price growth – something we are already seeing. Keep in mind that prices are still projected to increase, just at a more moderate rate. Decelerating home prices do not mean depreciating home prices. A decelerating environment means there’s appreciation, just at a more moderate rate – single digit growth as opposed to the double digit growth we have recently seen.

The average of those forecasters 8.5%. Now, I think of this as an important point that we need to focus in on. Forecasters are calling for appreciation, but we have to really understand why they’re calling for appreciation. But when you look across from Fannie, Freddie, CoreLogic, all of these forecasters, the average of 8.5% appreciation, not what we saw last year, tremendous appreciation, we said, gosh, this feels too hot, and coming in this year with something a little bit more normal. Now, these forecasts started the year at about 5% and they’ve ratcheted up. They’ve kind of settled in here right about 8%. If you remember on the monthly market, we’ve called for between 8 and 10% appreciation. But you’re seeing that moderation through rising interest rates. Price will always be determined by supply and demand.  https://www.fanniemae.com/media/43571/display https://www.freddiemac.com/research/forecast/20220418-quarterly-forecast-purchase-market-will-remain-solid-even-mortgage-rates-rise https://www.corelogic.com/intelligence/find-stories/corelogic-hpi-posted-record-year-over-year-growth-in-2021/ https://pulsenomics.com/surveys/#home-price-expectations https://cdn.nar.realtor/sites/default/files/documents/forecast-q2-2022-us-economic-outlook-04-27-2022.pdf https://www.zelmanassociates.com/ (with subscription) https://www.mba.org/docs/default-source/research-and-forecasts/forecasts/mortgage-finance-forecast-june-2022.pdf?sfvrsn=e3eb1d80_1

The average of the home price forecaster is 8.5% for 2022. Price will always be determined by supply and demand, so we will want to look at Home Price Expectation Survey.

This is 100 economists, housing market experts, those that are in the know with housing across this country. But they survey every quarter and they say, what do you see for appreciation this year and the four years ahead that make kind of a five-year window. And you can see it right here, from the Home Price Expectations Survey, 9.3% appreciation, sort of in line with what we saw in the other forecasters, 8.5%, 9.3%, that 8-9% range and then 4, 3, 4%, as you see in the years going forward. So my message right now, based on what experts are saying is you’re likely to see a good appreciation in housing this year. The average going back 3.8% in residential homes across this country and appreciation and in ‘23, ‘24, ‘25, looking at more normal appreciation.   https://pulsenomics.com/surveys/#home-price-expectations

The Home Price Expectation Survey is comprised of 100 economists and housing market experts across the country. The survey occurs each quarter and forecasts appreciation for the current year and the four years ahead – to make a five-year window. Again, we see that 8-9% range and then about 4% going forward.

The root issue of what drives house prices almost always is supply and demand...  now interest rates affect that. When interest rates go up, guess what, fewer buyers. The demand goes down thus prices are going to soften or not be as cray-cray as they have been. And that’s what we’re seeing right now.  David Ramsey, Personal Finance Personality

With prices being determined by supply and demand, let’s take a look at supply first.

single family housing units completed, going all the way back to the seventies. Everything in the blue there, every year the number of single family housing units brought to market is pre-2008, everything before the housing crisis. In the bar there, the average annual units completed reference the 50-year average in the number of homes brought to market. \So for the last 14 years, we have been below the 50 year average in the number of builds brought to market.  www.census.gov/construction/nrc/xls/co_cust.xls

For the last 14 years, we have been below the 50 year average in the number of builds brought to market. Builders were affected greatly in 2008, and maybe may moved on to other vocations, but it looks like we will surpass the 50 year average soon.

the millennial generation, largest generation behind the baby boomers, just a little bit behind in sheer size of the generation. But they’re moving through the peak home buying years. According to NAR, in their recent Home Buyer survey, 81% of first time home buyers fall in this category, in this age range; 43% of all buyers fit in this category. So tremendous, tremendous demand, tremendous, tremendous volume coming from those that want to buy, driven by the millennial generation.   https://data.census.gov/cedsci/table?q=United%20States&t=Populations%20and%20People&g=0100000US&tid=ACSST5Y2020.S0101 https://www.nar.realtor/newsroom/nar-report-shows-share-of-millennial-home-buyers-continues-to-rise

The demand side is driven by millennials that are moving through the market. The millennial generation is the largest generation behind the baby boomers, and they’re moving through their peak home buying years. According to the National Association of Realtors® (NAR) Home Buyer survey, 81% of first-time home buyers fall in this category, and 43% in this age range.

Bottom Line

Experts don’t believe the market is in a bubble or a crash is in the cards like during the Great Recession.

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