A forecasted softening in home price appreciation is good for both buyers and sellers. Here's why a slow down is good news for the market.
Many forecasters are calling for slower home price appreciation (HPA) and that is a very good thing.
As Core Logic reported recently, home prices rose 18.1% year over year from August 2020 to August 2021. "Annual home price growth was the most that we have ever seen in the 45-year history of the CoreLogic Home Price Index. This price gain has far exceeded income growth and eroded affordability,” wrote Frank Nothaft, chief economist for CoreLogic, in his latest market outlook report.
This level of HPA is completely unsustainable. When HPA rises at 3 to 4 times wage increases it can destabilize the affordability of homes values and home sales.
Housing bubbles might occur, and potential buyers might decide to wait until things stabilize.
In fact, as more resale listings come to market and home builders continue to build more homes, most analysts are looking at the market to stabilize. Many are saying that this is already happening.
But make no mistake about it. As Lance Lambert, the renowned data wonk for Fortune Magazine reported in October, “don’t mistake this softening for a correction.” In fact, slowing is a good thing and for several reasons we are in for a very good real estate market for many years ahead.
Here are a few reasons why:
1. Power in 33
The number 33 matters. The biggest generation in history, the millennial or Gen Y, is just entering their early 30s with the largest cohorts not yet there.
Age 33 is the peak first time homebuyer year for Americans and as the data shows that the power of the millennials is just at the forefront of their peak home buying spree.
In fact, there are ever increasing cohorts of millennials heading into the peak homebuying age – 33 – for years ahead. As Lambert pointed out, “The pandemic has also coincided with the largest tranche of millennials (in particular, those born 1989 through 1993) beginning to hit their 30s – typically the big first-time home-buying years.”
Facts are a funny thing because you can’t argue with them. You can’t stop the wave coming into homeownership, a wave that will be only closely matched to the baby boomers when they started buying homes in the early 1980’s.
2. Millennials more prepared than their predecessors
Millennials are more prepared to buy. They have higher earnings and higher academic attainment than either the baby boom generation or Generation X.
This ability-to-buy factor means that a higher percentage of millennials will qualify to buy than either of the previous two generations. So, not only is this the biggest generation in history, but more of them will be able to afford a mortgage.
3. Home price increases will moderate
Price increases will moderate to a more sustainable low-single-digits annual rate.
This will happen for two main reasons. First, the resale market did not take shape as it normally would have in 2020 or 2021. The key spring markets for both years were altered, due to a nation wrapped up in the COVID pandemic.
This kept many prospective sellers in their homes, preferring not to risk getting sick or exposing their families to prospective buyers coming through their homes. This also kept many from looking at homes to buy. The disruption caused significant pent-up demand to sell. Now, with considerable and historic equity built up, many expect a significant increase in sellers finally listing their homes for sale, leading to higher inventory and more subdued price gains.
Second, home builders will continue to bring ever increasing volumes of homes to market over the years ahead, as supply chain shortages slowly resolve themselves. The increased inventory will help the supply versus demand variable, helping home prices to moderate.
4. Fears of a bubble will subside
For some potential buyers, the skittishness about buying into a bubble will subside. As home prices moderate, many will come back into house hunting. There is pent-up demand among buyers as well as sellers, for reasons mentioned above. It’s true that we have a high volume of home sales over the last 18 months. But if everyone who wanted to buy a home could find one, the numbers would be much, much larger. The massive generation of millennials entering their early 30’s, who are willing and able to buy a home, will continue to drive this market for years.
Fannie Mae’s recently released national housing survey shows two things. First, that this is the best time to sell a home in a decade. Second, it reflects potential homebuyers wanting to see things stabilize.
Both are happening right now, in real time.
Most housing economists are forecasting growth in home prices in the low single digits over the next several years. Buying sooner – near historic interest rate lows – will mean purchasing that home today at a lower price and at a lower rate than you might get a year from now could be the best decision.