According to Splitero CEO Michael Gifford, we’re still in an affordability crisis and unlikely to see a complete housing market tumble in 2023.
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It’s been a housing market roller coaster the past few years with no shortage of news about record-high prices, outrageous negotiations (like all-cash deals and cars), and questions about if there’s a bubble and if it’ll burst. The pendulum swung from a buyer’s market to a seller’s market as a result of the pandemic changed people’s behaviors. Families started feeling cramped after sheltering in place for more than a year, global supply chain issues picked up, and then-low interest rates began climbing.
While we’ve seen the stark rise in home prices flattening out a little from 2022, this downturn won’t wholly correct itself to pre-pandemic levels.
The most recent Case-Shiller Home Price Index, one of the leading indicators of U.S. residential real estate prices, showed that March 2023 home prices were 2 percent higher than March 2022. It’s worth noting that seasonality plays a role here, too, so we currently see some prices slightly lower given the time of year the stats are based on.
So yes, we’re still in an affordability crisis and unlikely to see the complete housing market tumble in 2023. Here’s why.
1. Homeowners are reluctant to sell
We’ve seen this anecdotally as homeowners come to Splitero to access their home equity instead of selling. Now the data is out: March 2023 U.S. Existing Home Sale volumes are down 22 percent compared to March 2022, according to the National Association of Realtors.
Homeowners’ motivation to sell is low because many are locked into low-rate mortgages and don’t want to give up that rate to sell and repurchase a more expensive home with a higher mortgage rate. With affordability at an all-time low, homeowners are finding ways to access their home equity for renovation projects to suit their needs better. Homeowners also use their increased equity to pad retirement and savings accounts, pay off high-interest credit card debt, and supplement living expenses as inflation grows.
Source: Mike DelPrete
2. Credit availability is exceptionally tight, and regulators removed faulty financial products
The housing market is expected to stay strong, mainly due to the current limited credit availability. This is a significant contrast to the situation in 2008, where obtaining loans was considerably more accessible for borrowers. During that time, several unsafe mortgage products enabled individuals with low credit scores to qualify for loans, but those have since been eliminated from the market. The 30-year fixed mortgage is the primary product, providing a more stable option for borrowers and lenders.
Source: Mortgage Bankers Association
3. Mortgage delinquency rates are low
Mortgage delinquency — when a homeowner is late on a required mortgage payment — overall rates are currently low. This is because lenders aren’t lending to borrowers with low credit scores. They’re only lending to those with a pristine credit score, related to point No. 2 above regarding less risky financial products on the market. This means the quality of the loans is better than before, which directly correlates to default rates.
Source: FRED – Federal Bank of St. Louis
4. Home equity is at an all-time high which means foreclosures aren’t coming
Homeowners have an incredible amount of home equity compared to 2008, putting them in good financial shape and allowing them to sell their property for a profit. According to CoreLogic’s Home Equity Report, individuals with outstanding mortgages in the United States experienced a 7.3 percent year-over-year rise in equity during the fourth quarter of 2022.
Data from Yardeni Research shows a record amount of $29.6 trillion of home equity in the U.S.
This accumulated home equity is helping homeowners avert foreclosures. Distressed sales — foreclosures and short sales — represented 1 percent of sales in January, identical to last month and one year ago, according to the NAR.
5. The housing market is starved for inventory
Over the last few years, the increasing demand due to lack of inventory has been one factor driving home price appreciation. Back in 2008, during the housing crisis, many tiny home builders went out of business, and new builds plummeted. New builds started to pick up again, but the global supply chain shortage increased the cost of construction materials like wood and slowed the progress.
New home listings are still low, according to Realtor.com’s March Housing Trends Report, which showed new listings were down about 20 percent year-over-year in March. New listings still lag behind pre-pandemic levels between 2017 and 2019 by almost 30 percent.
However, we have seen builder sentiment rising.
Because of low inventory and high demand, a combination of things will need to happen for prices to plummet
Since the real estate market is starving for inventory, there’s significant pent-up demand. We will unlikely see home price appreciation slow with a single factor like interest rates. Inflation, affordability, interest rates, supply and other factors will likely need to combine over the year to make home prices drop.
What will happen in 2023?
The housing market sentiment is growing, especially in home equity investments. We’ve seen cautious optimism from institutional REITs adding HEIs to their portfolios.
We’ll continue to see homeowners accessing their home equity to pay off high-interest debt, start renovation projects, or pad their savings and retirement accounts. We’re seeing homeowners looking to access their built-up home equity to gain financial freedom with no additional monthly payments and no new debt while the housing market remains hotter than usual.
Michael Gifford is the CEO and co-founder of Splitero.