2022 was a roller coaster for the housing market, characterized by two distinct scenarios. In the first quarter, we witnessed a massive growth in home prices with bidding wars, multiple offers, and no buyer contingencies, including inspections. Cash offers were prevalent, and even those financing had to bring cash to the table to pay for the difference between the offer price and the actual appraised value. This situation meant people were buying overpriced homes with years of deferred maintenance, leading to more buyer remorse. In addition, mortgage rates were still very low in the first quarter, with an average of 3.76% on March 3, 2022.

However, the Federal Reserve began raising interest rates on March 17, 2022, to curb inflation. The Fed has since raised interest rates nine times, with plans to raise them again during the May 2-3, 2023, FOMC meeting. Despite concerns from some experts about the potential consequences of raising interest rates further, the Fed is determined to continue down this path.

The second scenario for the housing market in 2022 was the second-largest home sale crash since World War II, raising concerns that another Great Recession could be looming. This situation prompted us to delve deeper into the current housing market trends and where they might be heading.

Inventory shortages and rising home prices remain major issues, with many potential buyers being priced out of the market. Most mortgage professionals have been telling buyers that the most important factor when buying a home is whether or not they can afford the payment. However, this approach has proven disastrous in the past, especially when buyers qualify for a mortgage with two salaries and lose one of those salaries.

If a buyer falls behind or defaults on their mortgage and overpaid for their home, selling it becomes challenging. Sellers are also struggling, as they cannot sell their homes for the same profits their neighbors achieved just a few months ago. Additionally, many sellers hesitate to sell their homes because of the lack of available inventory and concerns about finding affordable housing.

These factors have led to a decline in real estate sales in many U.S. housing markets, with some areas seeing a decrease of up to 40% compared to the previous year. Both buyers and sellers are pulling back from the market, leading to fewer sales and less inventory.

The current situation in the housing market underscores the importance of buying a home that is not overpriced, regardless of whether one can make the payment today or not. Overpriced homes and rising interest rates have made it increasingly difficult for buyers to enter the market, leading to a decline in sales.

The Changing Dynamics of the Housing Market in 2022

The housing market in 2022 has been characterized by changing dynamics, with buyer and seller demand peaking at different times compared to the previous year. In 2021, both buyer and seller demand peaked in June, while in 2022, buyer demand peaked in May, and seller demand peaked in June. This shift can be attributed to the Federal Reserve’s decision to raise interest rates by 50 basis points in May, causing shockwaves among buyers.

Historically, spring is the best time for sellers to get their best price as buyers want to move in before summer vacations and the back-to-school season. However, 2022 saw prices fall rapidly from the peak in May, with no uptick in median prices for the rest of the year. While some markets have record-low inventory, new construction is still prevalent in others.

A comparison of the current housing market with the 2008 recession indicates that we may not see another housing crash. However, it is important to note that we are only talking about a one-year difference between the peak in 2007 and the peak in 2022. Moreover, the government’s stimulus measures have prevented high foreclosure rates, and the labor market is still in recovery.

Sellers must accept the fact that they will not profit like their neighbors have over the last several years, and they must fix or replace worn-out items. Additionally, seller concessions, and buyer contingencies, are back to stay, and historically, they usually apply to about 50-60% of home sales.

Predicting the inventory situation over the next three to seven years may be premature. While inventory has reduced significantly over the years, foreclosures may eventually appear in the market, and accidental landlords may decide to sell their second or third homes. Mike Simmons, president of Alto’s Research, also notes a reduction in inventory over the last several years, which may have contributed to the changing dynamics of the housing market.

The Impact of Interest Rates on Home Prices: An Analysis

Odeta Kushi, the economist at First American Economics, presented a chart that showed the impact of interest rates on home prices. The chart demonstrated that as mortgage rates change by a percentage point, it equates to about a 10% rise or decline in the affordability of the home price. This means that if a homebuyer can afford the mortgage payment of a $450,000 home at today’s rate, and the rate goes up by one percentage point, from 5% to 6%, that same buyer can now only afford a home priced at $405,000.

The exchange rate between mortgage rates and home prices is crucial in understanding the impact of affordability on homebuyers. As mortgage rates go up or down, it can significantly affect the affordability of homes. Moreover, with the recent rate hikes by the Federal Reserve, homebuyers need to be mindful of their purchasing power and plan accordingly.

Additionally, it is essential to note that the median home prices in the US dropped from just a year ago. However, the low inventory and high demand for homes have kept prices from dropping significantly. While fewer price cuts may suggest lower list prices, historically, about one-third of homes receive a price cut from selling.

The housing market in 2022 had two distinct scenarios. In the first quarter, buyers experienced massive home price growth, multiple offers, overbidding, no contingencies, and cash offers. However, this resulted in many buyers experiencing buyer’s remorse, overpriced homes, and deferred maintenance issues. In March, the Fed started raising interest rates to curb inflation, and despite the struggles in the economy, they anticipate raising rates again in their upcoming meeting. The second scenario saw the second-largest home sale crash since World War II, leading to concerns about a possible 2008-style housing market crash.

The low inventory is one reason for the current situation. Buyers have backed out of the market, and sellers are holding out, not wanting to give up their three-and-a-half percent interest rates and still hoping for massive profits like their neighbors. However, this situation is expected to change over the next couple of years due to potential foreclosures and accidental landlords deciding to sell their properties.

Real estate professionals have been advising home buyers that affordability is the most crucial factor in buying a home. However, this advice has proven disastrous in the past, especially for those who qualified for mortgages with two salaries and suddenly lost one of those salaries. Buyers need to be aware of this and buy homes that are not overpriced.

The impact of interest rates on home prices is significant. As mortgage rates change by a percentage point, it equates to about a 10 percent rise or decline in the affordability of the home price. This means that buyers have been knocked out of the market due to the rise in interest rates. Home prices have dropped since the peak in 2022, but many U.S. cities are still considered overpriced.

Renting is currently more affordable than buying across the country, except for Pittsburgh, Pennsylvania, and Buffalo, New York. Zillow has reported that 47 top U.S. markets are cheaper to rent than buy.

In conclusion, the current housing market situation is complicated, with low inventory, rising interest rates, and overpriced homes. Buyers need to be careful and buy affordable homes, while sellers need to accept that they won’t make the same profits as their neighbors did in previous years. The housing market’s future remains uncertain, with potential foreclosures and accidental landlords deciding to sell their properties.