What is causing the imbalance in the housing market
As brokers work to get more people into homes, they’re facing challenging market conditions in the US that make the task more difficult.
This is especially true for first-time homebuyers, whose budgets are more constrained than those of previous generations. That doesn’t even take into account soaring insurance and property tax costs awaiting those buyers once they land their new home.
It’s an interesting phenomenon going on in the market. One economist said it is similar to the effects seen in a recession, but in a much different way.
Thom Malone (pictured top), principal economist at Cotality, said the current market imbalance is contributing to some of the affordability issues buyers are facing.
“It is an interesting time, because the imbalance we're at right now is interesting,” Malone told Mortgage Professional America. “In the United States, the housing market works more around a volume cycle than a price cycle. There was a housing market crash once, but that's the only one. Besides that, prices have not really ever fallen a substantial amount.
“Because what happens is when there becomes an imbalance between the price people can pay and what sellers are expecting, sellers can wait it out, essentially. This is possibly because we have fixed-rate mortgages, which is kind of a uniquely American thing. I'm from New Zealand originally. There's nothing like that there.”
A market in hibernation
Malone said the unique conditions in the US have led to a sort of “reverse recession,” as wages haven’t kept up with rising house prices.
“We kind of get this volume cycle,” Malone said. “So we’re in a situation right now where this resembles recessions from the last century, but in the opposite way. It's not the economy that's dropped, it's the housing market that's boomed, and the economy hasn't boomed at the same pace. So there's an imbalance.”
The process to fix that imbalance will likely take time. More housing supply is needed to try to give wages a chance to catch up to home prices.
“So it might be a long period of slow appreciation, while the economy kind of slowly catches up,” Malone said. “If we build more homes, there will be more options for buyers and more affordable prices. The market's in hibernation, is my assessment of it right now, and it's going to sort of slowly wake up.”
This market imbalance hurts current homeowners who want to sell but feel the market has swung too far toward buyers. Malone said this adds to the hibernation of the overall market, as additional inventory that would naturally come to market simply isn’t showing up.
“If you're trying to sell a house right now, you might be late,” he said. “There are always people who really need to sell that house right now. But there are a lot of people saying, ‘I would sell, but I'm not really getting the price I want. I'll try again in the summer. I'll try again six months after that, until I get the price I want.’ If they moved, they would have to downgrade. For them to maintain their current quality of home is actually higher than the sales price.”
A market correction
It’s not just local markets that get affected by this slowdown. Malone said it also affects markets in other areas, because people who may be considering relocating for work now have to pass up on that job because making that move either forces them to downsize in their new market or raise their housing expenses.
“They say, ‘I'm just not going to make a move, because I'd have to downgrade,’” he said. “It’s like, ‘I'm not going to take a job in another city, because I'd have to get a higher mortgage rate, and I'd have to move into a small home, and I'm just going to stay here.’ That has downstream effects on the market because you're not selling your home, which means there's nothing available, which means there are fewer homes available for a larger group of buyers.
“It’s harder to get into the matching process here. If you’re not a seller, you're also not a buyer in the place you were going to buy. It’s like, ‘I have a job offer in Ohio, but I can't sell my home in Virginia because I’ve got a super low rate. So, now I'm not going to move. So that means there's one less home on the market in Virginia and there's one less buyer in Ohio.”
In the short term, a continued decline in rates would help correct some of the imbalance. Otherwise, Malone believes the market will naturally return to balance as people are forced to refinance low-rate mortgages due to life events.
“A rate drop would accelerate this,” he said. “It will also kickstart a lot of refis, potentially from people who bought after rates increased. Otherwise, the market will slowly fall out of this because, eventually, people just have to move for some reason. They lose the so-called golden handcuffs, and they move into another home. Eventually, just enough happens that it'll cascade and the market will stop moving at this pace.”
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