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Housing Market: Are we going to be in a recession and when should I buy?

  • / Updated:
  • Abbi Aruck 

The housing market has been volatile since the pandemic.

Housing market and homes for sale

Read on to find answers to your questions about the current state of the housing market and what it will look like in the next year.

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Are we in a recession?

The price of a home is up 35% since March 2020 and the US Federal Reserve has been changing rates aggressively to manage inflation. The cost of a home is determined by supply, demand, and affordability.

When the pandemic first started, the supply of houses was low, but demand was dramatically rising. Luckily, at the start of the pandemic, affordability was high because of historically low mortgage rates.

Today, the inflation rate is the highest it has been in 40 years. The Federal Reserve is raising rates at a pace that hasn’t been seen since the 1990s. From the lowest point, interest rates have more than doubled, now reaching close to 6%. This level hasn’t been reached in over 13 years.

Higher prices and higher interest rates have made the market difficult to navigate right now. Right now, we are heading towards a path of recession by 2023. If that becomes a reality, job loss could force people to sell their homes or enter foreclosure.

Regardless or the recession or not, activity on the housing market is slowing. In May, existing home sales decreased 3.4% and building permits were down 7% from the month before. Mortgage applications are also below last year’s level.

Limited housing supply

The supply of homes is still historically low. Right now, the existing inventory for sale is1.16 million and housing starts at 1.55 million. This, in conjunction with a decade of underbuilding relative to population growth has led to a shortage of both housing to buy and to rent.

To offer prospective, in 2007 before the financial crisis, the existing inventory of homes was 3.89 million. That means that upon entering the recession, there were about 3 million more homes on the market.

What is going to happen to the cost of buying a house?

Next year, the price of buying a home will likely slow as demand decreases in the face of higher mortgages and generally not being able to afford it. Goldman Sachs estimates that in the coming quarters, the price of a home will slow dramatically before falling to zero in the third quarter of next year.

Existing home sales have already dipped 30% from the peak and will likely fall further– which will impact prices.

Is this housing market slow down similar to the crash in 2008?

The housing slow down that we are experiencing now is different from the one in 2008. This slow down is a supply-driven crisis, rather than a demand-driven crisis. In 2008, the market was flooded with mortgage rates that they couldn’t repay.

The current crisis has been fueled by the record-low interest rates at the same– Americans were getting stimulus payments. As many people started craving more space during the pandemic, people started moving.

The Federal Reserve has been moving rates at the fastest pace in three decades. This is being done in attempt to bring persistent inflation under control. There were two consecutive hikes in June and July and another big hike is in the cards for September.

The combination of high home prices and the rapid rise in borrowing costs has pushed many entry-level homebuyers out of the market.

Now is not a good time to buy

From a perspective of affordability, right now is probably the worst time to buy a house. Since the beginning of the year, mortgage rates have increased by more than 2%. As of August 25, the rate is 5.55%. Although this rate is slightly lower than it was in June, the volatility has been enough to really slow demand.

In July alone, 63,000 home-purchase agreements were cancelled– that’s equal to 16% of homes that went under contract that month. If you are determined to buy now, take advantage of the slowed demand to gain power during negotiation.

Where is housing the most affordable?

Luckily, lots of sellers have reduced their prices in recent months. Most of the places that have reduced the cost of homes, were very popular at the start of the pandemic. Some of the cities that are experiencing price drops are:

  • Boise, Idaho– 61.5% of sellers have reduced their asking price
  • Denver, Colorado– 55.1% of sellers reducing prices
  • Salt Lake City, Utah– 51.6%
  • Tacoma, Washington– 49.5%
  • Grand Rapids, Michigan– 49.3%
  • Sacramento, California– 48.7%
  • Seattle, Washington– 46.3%
  • Portland, Oregon– 45.7%
  • Tampa, Florida– 44.5%
  • Indianapolis, Indiana– 44.1%
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