We speak of correction when there is a decline of 10% or greater in the price of a security, asset, or a financial market. The stock market last year was in bear market territories and the housing market experienced a correction. Many economists and professional speculators and forecasters have predicted that the housing market will crash, and this crash could potentially trigger the recession that we’ve been all awaiting. The housing market, however, seems to be doing better, which even makes us wonder if the correction is over.
Source: Federal Reserve of St. Louis
In 2022, U.S. home prices have kept on climbing in the pandemic housing boom, leaving many potential buyers wondering how they could afford a place of their own in this red-hot market. The housing market has been relatively stable thereafter the financial crisis of 2008. According to the Federal Reserve of St. Louis, the median prices for American houses rose from approximately $323,000 in 2020, at the start of the pandemic to around $429,000 in the first quarter of 2022. Over the same period, U.S. inflation reached 11.5 percent, which made the average house price still $68,000 higher than in early 2020, even when adjusted for the measure. What led to this drastic rise in home prices was the fact there was more liquidity in the economy. The Federal Reserve increased the money supply in 2020, which increased the purchasing power of many ordinary Americans. As many Americans felt extra richer than usual, demand for goods and services started to rise sharply. Many Americans poured into the housing market to purchase houses, which logically led to the rise of home prices. As a result, inflation began to happen in late 2021 and has been ongoing since.
Source: Redfin Analysis of MLS Data
The Federal Reserve has been increasing interest rates aggressively since the first quarter of 2022. And since then the price of housing started to fall because the interest rates increased the cost of borrowing, which means the cost of affordability increased. Hence, it became much more difficult for people to afford to buy a home. Indeed, home sales prices fell 35%, which is considered the largest drop in at least seven years. In October 2022, 30-year mortgage rates rose to 7.08%. In 2020, mortgage payments averaged $1,500 per month. In 2021, mortgage payments slightly increased, and averaged $1,650 per month. In 2022, mortgage payments surged 48.5% year over year. It augmented from $1,750 to $2,500 a month. Inflation started to decrease slightly between December 2022 and February 2023. Inflation decreased from the high 7% to the low 6%. This then leads to a slight decrease in home prices.
The housing supply remains low. According to Macro Trends founding partner, Mitch Roschelle, the supply of homes is still “relatively low”, with a 3.3-month supply on the market. Uncertainty about the economy and a rise in unemployment could hasten the housing market downturn, creating the largest correction in the post-World War II era. The current correction stands as the second largest in the post-WWII economy, behind the housing market crash and mortgage crisis of 2008. Can we then claim that the correction is over due to a fall in home prices, which could potentially give opportunities to homebuyers to flood the housing market again? Perhaps not. Inflation may have declined slightly, but it remains high, and the Federal Reserve maintains interest rates at levels, which deter investors and consumers from undertaking investments in financial markets.