What on earth is happening in the world of real estate? This is a question homeowners (and prospective homeowners) are anxiously trying to figure out. Over the past 6 months, the economy has changed significantly sending ripple effects throughout the housing market.
Listed below are what I see as the key contributors to this change:
· Unsustainably low interest/mortgage rates since the early 2010s.
· Economic stimulus checks in 2020 and 2021.
· COVID's transition from pandemic to endemic.
· The great resignation.
· The Russian invasion of Ukraine.
After the recession of 2007-2008, the Fed slashed interest rates in order to stimulate economic growth. This stimulus strategy was so effective, that even after the recession ended, the Fed kept its feet on the gas - partially due to political pressure - thus generating one of the longest economic boom cycles in recent history. But what goes up must come down, right? Perhaps, but that's a conversation for a different day. What we do know is that artificial financial stimulus, when used indefinitely, handcuffs policy-makers from making drastic moves again in the future. Fast forward to 2020, and along comes COVID, forcing the government to dish out billions more, and, perhaps, tipping the scales past the point of no return.
For the average American, all of these efforts helped significantly, and while it's easy to see what we could have done differently in hindsight, most generally agree that these were effective strategies to cope with extreme hardship. However, stimulus on top of stimulus on top of stimulus isn't sustainable forever, especially when we're on shaky ground. In 2022, two key things happened that sent shockwaves through the world economy.
First, the end of COVID (at least full-blown lockdown mode COVID) seemingly came to an end, thus allowing Americans to get back into the world and spend money on all the things they couldn't do over the past two years. While this is normally a good thing, we lacked the labor force to cope with such high demand, and if there's one thing I learned in Econ 101, it's that low supply and high demand lead to high prices. Couple that with the tragic Russian invasion of Ukraine, which further strained supply chains, and we have full-blown inflation.
One of the best ways to curb inflation is to raise interest rates, which the Fed did abruptly on several occasions this year taking mortgage rates to "record highs". Rates in some places have even doubled, approaching the 6% mark, but is this really a hike or just an instantaneous snap back to reality? Sure, interest rates have gone up a lot, but from a historical perspective, they're actually pretty low. The chart below tells it all.
That said, a 2-3% rate increase isn't fun for anyone in the market for a new home. Historical perspective, as important as it is, is meaningless to the average homebuyer whose anticipated monthly payment just went up by $200, and that's almost certainly going to impact home prices. But has it?
Compared to this time last year, Central Ohio home prices are up 10%. However, compared to last month, prices are actually down 2% and homes are selling 1 day slower (13 days versus 12). This dip that registered for the first time last month isn't yet a trend and is leaving a lot of economists and investors uncertain at best. A term that's been floating around in real estate circles lately is "cooling" - as in, the housing market is cooling off.
Ben Graboske, president of Black Knight Data & Analytics recently stated, “the slowdown was broad-based among the top 50 markets at the metro level, with some areas experiencing even more pronounced cooling. In fact, 25% of major U.S. markets saw growth slow by three percentage points in June, with four decelerating by four or more points in that month alone.”
In less technical terms, home prices are leveling out from the gains of the past few months. However, I tend to think this is a plateau of sorts rather than the start of a downward spiral. After all, price is not only impacted by interest rates, but also by supply and demand, and those metrics don't appear to be changing. In fact, supply is likely to be even more constrained in the coming months as supply chain issues continue and increased construction costs disincentive builders and developers.
In sum, the housing market has been on fire (in a good way) for more than a decade. Recent rate hikes may have put out the flame, but many of the underlying factors that initiated Ohio's boom market are here to stay. “We continue to see a healthy housing market in Columbus through the summer,” said Sue Van Woerkom, 2022 President of Columbus REALTORS®, “Central Ohio is a sought after region booming with business, entrepreneurship, and culture. It’s not surprising that our housing market reflects these strong qualities.”
If you ever have any questions about your specific market, town, or neighborhood, don't hesitate to get in touch. And if you're selling your home, consider reaching out to learn how you can save thousands of dollars in commission fees. Until next time, stay classy Ohio.