Greg Englesbe Real Estate
Real Estate Investing

With home inventory climbing, is the U.S. housing market in a deceptive recovery?

It’s tempting to look at the U.S. housing market in 2022 and gasp at the turn of events this year, compared to the frenzy of the previous two.

The 30-year-fixed mortgage rate has gone up from about 3% in January to about 5.8% at the end of June, part of broader strategy by the Federal Reserve to tame inflation. And in many ways, the housing market has been emblematic of the nation’s inflation problem over the last two years.

The upshot of the Fed’s interest rate hikes is that mortgage affordability has pushed large swaths of potential home buyers out of the market. With home prices still climbing, the low supply of starter homes in the $150,000-$250,000 range makes it very difficult for buyers to compete for homes, let alone afford them.

But could it be that the current hardships are actually signs of an intended recovery? Or is the housing market on an unconventional path that forms part of an approaching recession in the U.S.?

A report this week from shows that the number of real estate listings in the U.S. have risen by 18.7% in June compared to last year. That’s an addition of 98,000 more homes for sale every day compared to the same time in 2021.

It’s small progress, considering that the supply of homes for sale was 53.2% greater in June 2019 than it is today, but it is a sign that the market is responding to the Fed’s policies.

The rush to list new homes is partly driven by prices continuing to rise, with a record median price of $450,000 in June. That’s up 16.9% compared to last year and 31.4% compared to June 2020.

For now, home price appreciation hasn’t slowed down, but that may be the next development, according to the report:

The flood of new homes on the market likely means (buyers will) have more leverage when it comes to negotiating down the asking price. This, in turn, could help temper the raging seller’s market of the past two years and begin to balance the highly lopsided negotiating dynamics. chief economist Danielle Hale noted that the U.S. now has roughly as many home sellers as it had in a pre-pandemic market.

“At the same time, buyers have grown pickier as home prices and, more importantly, their monthly payment costs skyrocketed as mortgage rates surge,” Hale said. “We’re getting more supply of homes for sale just as demand is reaching a breaking point for many buyers, and this has led to a rapid rebalancing or reset of the housing market.”

This is an optimistic outlook on the direction of the housing market, one that suggests we’re in a recovery that hasn’t yet delivered relief.

The flipside of the coin is that the housing market may be headed toward “demand exhaustion” driven by the combination of high prices, high mortgage rates and still too few affordable homes.

Alcynna Lloyd writes for Business Insider that the housing market has skipped a phase in the typical real estate cycle on the way to a recession. Usually, there is a period of hypersupply when new home construction and slowed demand create a glut of homes that won’t sell, which in turn causes prices to fall.

Instead, the scenario we may face is that home prices will only fall if houses become so unaffordable that there isn’t a sufficient market of buyers.

“I doubt we’ll see very sharp, very sudden declines in the official price statistics over the next several months,” Mike Larson, a senior analyst at financial research company Weiss Ratings, told Business Insider. “But as conditions soften this year, it will gradually become apparent to buyers and sellers alike that the latest, greatest housing boom is kaput.”

Larson believes the extent of home price appreciation during the pandemic, together with the likelihood that interest rates will remain high for a long period of time, means a true recovery that restores supply and affordability.

In the background of the current state of affairs, Bloomberg reports the mortgage bond market has taken a major beating this year, giving up all of its gains over the last five years.

Mortgage companies have braced themselves based on their success over the previous two years, but the trend in 2022 is “disquieting” in that non-bank lenders represent a huge share of the mortgage market. Their dominance is a relative novelty since the last recession and the regulations that emerged from it, so volatility in this sector could pose uncharted systemic risks for policymakers looking to ease the housing market and wider economic challenges.

The age-old question of whether a recession will be a self-fulfilling prophecy looms large in the coming months, particularly with the mid-term elections fast approaching. It may be too soon to say where the housing market is headed, but it’s clear as day that it’s not what it was in 2020-21. Would-be buyers are feeling that more than anyone.

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