The Return of Normal Seasonality for Home Price Appreciation
If you’re thinking of making a move, one of the biggest questions you have right now is probably: what’s happening with home prices? Despite what you may be hearing in the news, nationally, home prices aren’t falling. It’s just that price growth is beginning to normalize. Here’s the context you need to really understand that trend. In the housing market, there are predictable ebbs and flows that happen each year. It’s called seasonality. Spring is the peak homebuying season when the market is most active. That activity is typically still strong in the summer but begins to wane as the cooler months approach. Home prices follow along with seasonality because prices appreciate most when something is in high demand. That’s why there’s a reliable long-term home price trend. The graph below uses data from Case-Shiller to show typical monthly home price movement from 1973 through 2022 (not adjusted, so you can see the seasonality): As the data shows, at the beginning of the year, home prices grow, but not as much as they do in the spring and summer markets. That’s because the market is less active in January and February since fewer people move in the cooler months. As the market transitions into the peak homebuying season in the spring, activity ramps up, and home prices go up a lot more in response. Then, as fall and winter approach, activity eases again. Price growth slows, but still typically appreciates. After several unusual ‘unicorn’ years, today’s higher mortgage rates helped usher in the first signs of the return of seasonality. As Selma Hepp, Chief Economist at CoreLogic, explains: “High mortgage rates have slowed additional price surges, with monthly increases returning to regular seasonal averages. In other words, home prices are still growing but are in line with historic seasonal expectations.” Why This Is So Important to Understand In the coming months, you’re going to see the media talk more about home prices. In their coverage, you’ll likely see industry terms like these: Appreciation: when prices increase. Deceleration of appreciation: when prices continue to appreciate, but at a slower or more moderate pace. Depreciation: when prices decrease. Don’t let the terminology confuse you or let any misleading headlines cause any unnecessary fear. The rapid pace of home price growth the market saw in recent years was unsustainable. It had to slow down at some point and that’s what we’re starting to see – deceleration of appreciation, not depreciation. Remember, it’s normal to see home price growth slow down as the year goes on. And that definitely doesn’t mean home prices are falling. They’re just rising at a more moderate pace. Bottom Line While the headlines are generating fear and confusion on what’s happening with home prices, the truth is simple. Home price appreciation is returning to normal seasonality. If you have questions about what’s happening with prices in our local area, let’s connect.
Why Today’s Housing Inventory Shows a Crash Isn’t on the Horizon
You might remember the housing crash in 2008, even if you didn't own a home at the time. If you’re worried there’s going to be a repeat of what happened back then, there's good news – the housing market now is different from 2008. One important reason is there aren't enough homes for sale. That means there’s an undersupply, not an oversupply like the last time. For the market to crash, there would have to be too many houses for sale, but the data doesn't show that happening. Housing supply comes from three main sources: Homeowners deciding to sell their houses Newly built homes Distressed properties (foreclosures or short sales) Here’s a closer look at today's housing inventory to understand why this isn’t like 2008. Homeowners Deciding To Sell Their Houses Although housing supply did grow compared to last year, it’s still low. The current months’ supply is below the norm. The graph below shows this more clearly. If you look at the latest data (shown in green), compared to 2008 (shown in red), there’s only about a third of that available inventory today. So, what does this mean? There just aren't enough homes available to make home values drop. To have a repeat of 2008, there’d need to be a lot more people selling their houses with very few buyers, and that's not happening right now. Newly Built Homes People are also talking a lot about what's going on with newly built houses these days, and that might make you wonder if homebuilders are overdoing it. The graph below shows the number of new houses built over the last 52 years: The 14 years of underbuilding (shown in red) is a big part of the reason why inventory is so low today. Basically, builders haven’t been building enough homes for years now and that’s created a significant deficit in supply. While the final blue bar on the graph shows that’s ramping up and is on pace to hit the long-term average again, it won’t suddenly create an oversupply. That’s because there’s too much of a gap to make up. Plus, builders are being intentional about not overbuilding homes like they did during the bubble. Distressed Properties (Foreclosures and Short Sales) The last place inventory can come from is distressed properties, including short sales and foreclosures. Back during the housing crisis, there was a flood of foreclosures due to lending standards that allowed many people to get a home loan they couldn’t truly afford. Today, lending standards are much tighter, resulting in more qualified buyers and far fewer foreclosures. The graph below uses data from the Federal Reserve to show how things have changed since the housing crash: This graph illustrates, as lending standards got tighter and buyers were more qualified, the number of foreclosures started to go down. And in 2020 and 2021, the combination of a moratorium on foreclosures and the forbearance program helped prevent a repeat of the wave of foreclosures we saw back around 2008. The forbearance program was a game changer, giving homeowners options for things like loan deferrals and modifications they didn’t have before. And data on the success of that program shows four out of every five homeowners coming out of forbearance are either paid in full or have worked out a repayment plan to avoid foreclosure. These are a few of the biggest reasons there won’t be a wave of foreclosures coming to the market. What This Means for You Inventory levels aren’t anywhere near where they’d need to be for prices to drop significantly and the housing market to crash. According to Bankrate, that isn’t going to change anytime soon, especially considering buyer demand is still strong: “This ongoing lack of inventory explains why many buyers still have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.” Bottom Line The market doesn’t have enough available homes for a repeat of the 2008 housing crisis – and there’s nothing that suggests that will change anytime soon. That’s why housing inventory tells us there’s no crash on the horizon.
How To Make Your Dream of Homeownership a Reality
According to a recent Harris Poll survey, 8 in 10 Americans say buying a home is a priority, and 28 million Americans plan to buy within the next 12 months. Homeownership provides many financial and nonfinancial benefits, so interest is understandable. However, all 28 million Americans will unlikely accomplish that goal in the coming year. Experts project around five million homes will be sold in 2023. Why is there such a big difference? It’s partly because there can be challenges to buying a home. In the same survey, when asked, “Which of the following are preventing you from pursuing homeownership at this time?”: 34% answered, “I don’t have enough saved for a down payment.” 30% answered, “My credit score.” If you aim to buy a home, here’s what you need to know to accomplish that goal. Save for Your Down Payment Your down payment is a big chunk of what you pay upfront for your home. For most home purchases, buyers put down some amount of cash up front (a down payment) and then take out a loan (a mortgage) to pay for the rest. It’s a longstanding myth that you must pay 20% of the purchase price for your down payment. In reality, 20% down isn’t always required. In fact, according to the National Association of Realtors (NAR), today’s median down payment is 14% for the average buyer and just 6% for a first-time buyer. Regardless of how much money you can save for your down payment, know there’s help available. A local lender can show you options to help you get closer to your down payment goal. Plus, there are even loan types, like FHA loans, with down payments as low as 3.5% for some buyers, as well as options like VA loans and USDA loans with no down payment requirements for qualified applicants. Beyond assistance programs and different loan types, here are a few other tips to help you as you save for your down payment: Remember to factor in closing costs. In addition to your down payment, closing costs are usually 2-5% of the home’s purchase price. Maintain your savings. Your down payment shouldn’t deplete all your savings. It’s important to still have some money set aside for homeownership expenses after you move in. Explore your options and lean on your trusted advisor for expert guidance. Do your research, ask questions, and look into the resources available for buyers like you. Improve Your Credit Score Your credit score is a number that indicates how financially reliable you are to lenders. A higher credit score usually means you’ll be able to borrow more money at a better interest rate. If your credit score is preventing you from getting an affordable mortgage, there are steps you can take to improve it. Here are two: Pay your bills on time. When you pay your bills on time, your credit score improves. When you’re late, it takes a hit. One way to make paying your bills on time easier? Set up automatic payments when and where you can. Mix it up. From auto loans to credit cards to mortgages – there are several different types of credit. And having a mix of them improves your credit score. Bottom Line If you want to purchase a home this year, let’s connect so we can start preparing. Search for your dream home now!
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