One of the most interesting phenomena associated with the pandemic has been the incredible demand for, and price of, residential real estate. Many factors influenced this supply demand imbalance including the flight from urban areas, work from home, labor and materials shortages, and a continuation of longer term population shifts. Incredibly, the median home price increased 40% to $450,600 between April of 2020 and April of 2022. At $570,300, the average home price is even more daunting to buyers. Moreover, the interest rate on the average thirty year mortgage rose from 3.31% in mid-2020 to 5.1% last month. Combining the increases in home price and interest rate, the monthly mortgage payment for the median home increased 73% to $1,957.23 assuming the typical 80% loan! During the same period, personal income increased by a total of only 1.75% and do not forget that there has been significant inflation in the cost of food, gasoline, and many other necessities. By the way, the median buyer must scrounge up a down payment of $90k at today’s prices!
Economics teaches us that such a dramatic increase in cost should impact demand, but sales and price increases continued unabated for 2021. While there is no evidence of a break in prices just yet, the number of houses sold has now decreased for four consecutive months falling almost 30%. Moreover, the annualized sales rate has declined 43% from the peak in August of 2020. And, the inventory of unsold homes has risen approximately 21% year-to-date. Time will tell whether we have actually passed the peak but there are at least a few signs that housing may be returning to earth.