The Crash That Didn’t Come: Has the Housing Market Already Bottomed?

Dave:
Hello everyone, and welcome to On the Market. I am your host, Dave Meyer, and today I am doing the show alone. We’re going to be doing a deep dive into a question that has been coming up on my newsfeed like crazy over the last couple of weeks, and I’ve been kind of surprised by it. And so I decided to look into this topic, and I’m going to share what I’ve learned about it and my opinions about it over the course of this episode.
Now the question that I researched and we’re going to talk about today is, has the housing market already found a bottom? And honestly, for the last couple of months I didn’t really think we were going to be talking about bottoming out of the housing market until at least the second half of 2023, maybe into 2024. But there has been a rash of headlines from reputable organizations talking about this. Just as an example, Mike Simonsen, who’s the CEO of Altos Research, a pretty prominent, very reputable real estate data firm, put out an article called Has the Housing Market Already Found a Bottom, pretty straightforward. We also saw The Wall Street Journal run a headline that says The Housing Market is Showing Signs of Thawing. Yahoo and Fortune ran headlines asking if demand has already hit bottom in November, and Goldman Sachs, one of the largest banks and most prominent economic forecasters in the entire United States, actually upwardly revised its housing market forecast for 2023.
And that’s really noticeable, because most forecasters, at least in the second half of 2022, were making their forecasts go down. Zillow kept adjusting their expectations downward. We were seeing other big banks, other real estate firms downward. We were seeing other big banks, other real estate firms downward. So this question is something that sort of fascinated me. Are we close to the bottom? I looked into it, and what I’m going to do today is share with you the data that I found. This way, you can decide for yourself whether you think that the market has already bottomed, if it’s going to start growing again, if there’s much more downside risk, and I’ll share my opinion with you at the end, but for most of the show what I’m just going to talk about is why these businesses, why some of these reputable firms are saying that the housing market may have found its bottom.
And you don’t have to agree with that. I’ll let you know my opinion at the end. But I will just say that there are fundamentally sound ideas why they’re saying this. It’s not just fanfare and cheerleading for the real estate industry. There is actually economic and real estate data that has come out recently that has suggested that maybe the worst is behind us. I’m not saying that’s true, I’m just saying there are some indicators that are pointing in that direction, and therefore it is worth understanding. Things are shifting and I want to help you understand what has shifted, and then you can decide for yourself if you think that means the housing market has bottomed out at all. And again, at the end I will share my opinion and let you know what I think is likely to happen.
Okay, so that’s what we’re going to talk about today. But before we get into that, I do want to thank everyone who wrote us a review on Apple or Spotify recently. We asked people to write reviews because it really helps us a lot here at On the Market, and we got some amazing reviews and I’m really grateful for everyone who took the time to do that. We appreciate it. We read every single one of them. We appreciate your feedback. And if you haven’t given a review but you love the show, we would appreciate even more of them. So thank you all for being listeners, members of our community, it is a huge help to us when you do something like that. So again, thank you. Secondly we do have to take a quick break to hear from our sponsor, and then we are going to get into our topic, has the housing market bottomed out.
All right, so when I started to look into this question of has the housing market bottomed out, I basically sorted my research into two different sides, demand side and supply side. As with all things economics, it really comes down to supply and demand. Let’s talk about demand side, because I think first, because I think that is sort of what has driven market behavior over the last six months or so. Basically since May or June, when interest rates and mortgage rates start to skyrocket, we’ve seen the housing market enter a correction. And that is basically because rising mortgage rates has reduced demand. People were happy to buy homes even at elevated prices when mortgage rates were 2%, or 3%, or 4%. Fast-forward to June when they went up to 5 or 6%, people could no longer afford it, and so they drop out of the housing market because they’re no longer looking for a home. That reduces demand, and that puts downward pressure on housing prices. That’s basically what we’ve seen since May, June of 2022.
And just to give you an anecdote here, at the beginning of the pandemic, housing affordability was one of the highest it’s ever been back in 2020. It was easy for people to buy homes, because prices hadn’t gone up that much but mortgage rates were super low, and that’s what sort of started this frenzy that went from 2020 to the middle of 2022. Now, in the second half of 2022, we actually saw that housing affordability, and there are different ways to measure this, but by one of the more reputable ways to measure it, housing affordability reached a 40 year low. And what happens when that happens, when affordability goes down is pretty obvious right? People just back out of the market. And so again, that is what we have seen.
But an interesting thing has happened since November, and that is affordability has actually started to improve because mortgage rates have gone down. Mortgage rates, the average for a 30 year fixed rate mortgage actually peaked for, so far, it definitely could still go up but so far in this tightening cycle, it peaked at around 7.4% back in November, and recently in January, it was down as low as 6%. Now, that’s still double where we were a year ago, so it’s not like we’re all of a sudden at great mortgage rates again relatively speaking. But in the context of understanding whether the housing market has bottomed, some of the pressure from the housing market has been taken off because mortgage rates have come down. And we’re not going to get super far into this, but just so you know, some of the reasons mortgage rates have gone down is basically because the pace of inflation has declined a bit, and people basically don’t think that the Fed is going to keep raising interest rates that much. And there’s also a lot of recessionary fears, and when recessions come, mortgage rates go down.
And so there’s a complex factor of things going on, but what you need to know for this conversation is that they are now sitting in about the mid-six percents, still super high, double where they were last year, but lower than where they were in November. And that has helped take some, not all and not even close to all, but some of the pressure off of the housing market in terms of affordability. Now, we’re going to talk about this a little bit later, because of course this whole context of this conversation is about whether the housing market is bottomed. There is absolutely, and I just want to be clear about this, there is absolutely no assurance that mortgage rates won’t just go back up in the near future. I’m going to talk about some different scenarios in a little bit.
But I just want to say now, TLDR, skip forward to the end, there is a very reasonable chance that mortgage rates go back up. So the is something to factor in when you’re thinking about if the market has bottomed. But just know that right now, houses are more affordable in January and February of 2023 than they were in October, November, and December of 2022. So that is something that suggests, and probably one of the main reasons all these companies are thinking perhaps the housing market has bottomed.
Now, just to supply some more evidence about how impactful just this modest decrease in mortgage rates is, there is something called the Mortgage Banker’s Association Mortgage Purchase Index. That’s a mouthful, let me just say that again. Basically there’s an organization called the Mortgage Banker’s Association. They send out a survey every single week to figure out how many people are applying for mortgages, both refinance and new purchases. What I’m talking about here is new purchases, and there’s basically an index. And so it doesn’t give you the exact numbers, it’s all relative to each other, but the index has been sitting between 185 and 205 over the last few weeks.
That probably makes no sense to you unless I give you some references, so let me give you those references. It was at at 160 at the end of October. That’s the relative number of people who are applying for mortgages in October was 160, now it’s 185 to 205. So that’s like a 10 or 15% increase in the number of people who are looking for mortgages. And if you’re wondering what this all means, it means that if more people are looking for mortgages, that means more demand in the market, which could have upward pressure on prices. Again, one reason why the housing market could have bottomed out. Now on the other side of course, a year ago it was sitting around 300, and we’re at 185 to 200, so that’s significantly down from where we were a year ago.
But nonetheless, demand has picked up in 2023. We’ve seen increases in the Mortgage Purchase Application Index five out of the six weeks in 2023, and no one’s saying… I don’t want you to think I’m saying there’s a lot of demand compared to last year, but what we’re talking about here is not, is the market as robust as it was last year. We’re talking about whether it has bottomed out, and the fact that it has grown five out of six weeks in 2023 is significant. So that’s just something that you should know, is that we have seen mortgage rates come down, that has actually gotten people back into the real estate market, more demand is entering the market right now, and that is probably one of the main reasons why some companies are forecasting that the market has bottomed and is likely to grow over the next couple of years. Again, I am not saying that personally, but that is one of the reasons, one of the sound fundamental reasons why people might be saying this.
And I just want to be clear that what I’ve been talking about is that demand, talking about demand, and some of these companies like Forbes and Fortune specifically said that they think demand has bottomed, but that prices might not have necessarily bottomed. And we’ll talk about that in a little bit, but that could be true, that more people could be getting back into the market, but if inventory goes up, prices could still go down. We’ll talk about that in just a minute.
So let’s actually just talk about inventory and the supply side, because that’s sort of the counterforce here. We’re seeing that demand has gone up, nowhere close to where it was last year, but has gone up a bit since October. And to know if the housing market is bottomed, we need to know if supply is rising in a corresponding way, or if that’s still down, or what’s going on. So I’m going to go through a couple of supply side metrics here, and you can decide for yourself.
So the first one is active listings. This is basically just how many listings are on the market at any given time. And according to Redfin, active listings are up 20% year over year. That is a pretty significant increase in the number of active listings. They’re still below 2021 levels, and they are far below 2020 level. So just for context, that means that we’re nowhere near active listings during pre-pandemic times, or even the first few years of the pandemic. But they are up from their lows in 2022, which is really significant. We just talked about that demand is about half of what it was a year ago, and even though it’s going up a little bit, it is still really far down. And then we’re also talking about how supply has gone up. And this is basically the argument counter to what these companies are saying. The argument that housing prices are going to continue to go up is that even though demand might be ticking up a little bit, that inventory is just too much. And when there’s too much supply relative to demand, that means prices are going to go down. So that is one thing that you should take note of, is that active listings are up year over year, but still far below where they were pre-pandemic.
Now there are two other measurements of supply I want to share, and those are days on market and months of supply. These are both other ways of measuring inventory. If you want to figure out how to calculate months of supply yourself, it’s basically inventory, the number of houses that are on the market in any given month, divided by the total number of home sales. That’s what months of supply means. In other words, it’s basically like how many months would it take to sell all of the houses on the market right now? And just for context, we have seen months of supply go up pretty consistently over the last couple of months, and we are nearing, at least this is according to Redfin, three months of supply. Now, for some context, this is up a lot from where we were in 2021 and 2022 when we were at about a month or month and a half of supply. On the other hand, we’re still below where we were in 2019 where it was above 3% months of supply.
And the reason I like months of supply and I think it’s such a key metric to watch is it measures the balance between supply and demand, right? So it doesn’t just say, this is how many properties are on the market, or this is how many people are looking for properties. It shows how quickly those properties are actually finding buyers. And it is still below the 2020 levels, the 2019 levels, but if you look at the graph, I’ll just describe it to you. It is almost directly shooting up. It is going up very, very rapidly. And to me, this is a very important metric to watch, because even though, again, even though demand may have bottomed, we don’t know, but there’s some evidence that it might be improving.
If this trend of supply and inventory is going up, I think there’s still a lot of downward pressure on pricing. Right? Months of supply have gone up from about 1.5 to almost three. It’s almost doubled in about six months, and there’s no sign yet that that has slowed down. If you look at days on market, which is a very similar metric to months of supply, they both measure how quickly things are coming off the market, you see basically the exact same thing. It has shot up rapidly over the last six months, still below pre-pandemic levels, but we’re seeing very significant increases to inventory.
So when you take all this information together, basically what you have is evidence that demand may have peaked, may have hit bottom in November or December. We don’t know. But there is some signs that we’ve hit the bottom at least for now. But on the other hand, when you look at inventory which is an equally if not more important metric right now, it is still going up at a rate that suggests to me that the housing market has not yet bottomed.
So I personally believe that it is way too soon to call a housing market bottom. I said this at the beginning, I kind of wanted to go into the data before I shared my opinion, but I think it’s kind of crazy honestly to start saying that the housing market has bottomed with all the economic certainty that still remains out there, right? We still don’t know how many more interest rate hikes the Fed is going to do, we don’t know what the “terminal rate” is. Terminal rate basically just means the federal funds rate that the Fed holds interest rates at for a while. We don’t know what that’s going to be. We don’t know if we’re going to go into a recession. We don’t know how quickly the economy is going to grow or shrink. There’s just so many questions that to call the bottom of the housing market right now seems extremely premature in my opinion.
Now, I get what they’re saying, and that’s why I sort of dug into this is like, I get that if mortgage rates have in fact peaked, and that’s a big if, but if they have in fact peaked, there is a case that people will jump back into the housing market in 2023, maybe inventory will level out, and the housing market is bottomed and we’ll grow. That is possible, but personally I don’t think it’s the most likely scenario. And I get in trouble for not explaining this enough when I’m forecasting, but when you’re forecasting stuff, you really need to think in probabilities. There is a case that the housing market has bottomed. I’m just going to say that maybe that’s a 20% chance, maybe that’s a 25% chance.
I think the far more likely scenario is that for the remainder of 2023, we see downward pressure on housing prices, and maybe that’s a 50% chance, and maybe there’s a 25% chance that we enter a full-blown crash where it’s 15% declines year over year in housing prices or more. So those are all possibilities. But I will just say that I don’t think that the housing market bottoming is very likely at this point. To me, there are really different scenarios that we have to think through, and you for yourself can decide whether you think which one is the most reasonable. So I’ll just lay out three or four scenarios, and you can decide for yourself. Because basically, I think the real big variables, the two things that we need to understand, is one, what’s going to happen with inflation and what’s going to happen with a recession.
So scenario one which could happen is that there is lower inflation. We’ve seen inflation fall five, six, seven months in a row. And so if inflation stays on that trajectory and there is also no recession, those things are independent. They don’t necessarily have to go together. But scenario one is there is lower inflation and no recession, which is probably the best case scenario for the economy as a whole, for the country as a whole, because people’s spending power gets preserved, and there’s no recession so less people lose their jobs, there’s more economic opportunity. That’s probably the best case scenario for the economy as a whole. But in that environment, rates could actually go up. Mortgage rates could go up, because if the inflation is lower but there’s no recession, the Fed could keep raising rates. Because if the economy is growing, they have more leeway, they have more cushion basically to keep raising rates without breaking something.
So without a recessionary environment, you could see bond yields rise. That could take mortgage rates up higher, and perhaps go above 7% again. I personally have a hard time imagining them, get above seven and a half percent, let alone 8%, but I’ve been wrong about interest rates, mortgage rates quite a few times in 2022. So take that all with a grain of salt, but because I’ve been wrong I’ve really been studying this a lot, and I think this is probably the case that the worst case scenario for mortgage rates in 2023 is that they go up seven and a half, maybe 8%, but that is accompanied by relatively good economic situation where there is lower inflation and no recession. So in this scenario, I don’t think the housing market will have bottomed right? Because if mortgage rates go back up, that’s again going to damage affordability, which pulls demand out of the market. And so scenario one, which is lower inflation no recession, although good for the economy as a whole, I do think could keep downward pressure on housing prices for the foreseeable future until mortgage rates come back down. So that’s scenario one.
Scenario two is lower inflation but with a recession. So again, we’ve seen inflation come down, it’s on a trend where it is declining. And again, I want to make clear to people when I say inflation is lower, that doesn’t mean prices are declining. It means that they are going up less fast, but that’s what the Fed cares about. Other people might want prices to go down, but what I’m talking about here is trying to predict Fed behavior, because mortgage rates are so important for the housing market. And what I’m saying is that what they want to get to is a rate of 2-3% inflation. And so if inflation gets lower and there is a recession, which to me is a relatively likely scenario, this is the best chance for mortgage rates. So unlike scenario one, this isn’t a great situation for the economy as a whole, because we go into a recession.
But this puts downward pressure on mortgage rates for two reasons. One, because there’s lower inflation, this will slow down the Fed’s rate of hikes. And also, recessions put downward pressure on mortgage rates. I know this is kind of hard to understand, but basically mortgage rates are based on bond yields. And when there is a recession, people want bonds. And when they want bonds, that pushes down the yield on bonds, and that takes down mortgage rates. I’ve done a couple of episodes on this, I’m not going to get too into it right now. But what you need to know is generally speaking, when there is a recession, mortgage rates go down. And so if we see the combination of lower inflation and a recession, this is likely to get mortgage rates down into the mid-fives by the end of the year, so it could go down even further.
So this scenario, I think this is the scenario that people who are saying that the housing market has bottomed are envisioning. They see inflation going down. They also see a recession coming, and that means that they think mortgage rates are going to go down even further, and that’s going to add more fuel to the fire for the housing market, and prices are going to have bottomed and go back up. Now, I think that is a very reasonable situation. I’m not saying it’s the most likely situation, but lower inflation with a recession, those are two things that a lot of people think are going to happen. And so I do think there are fundamentally sound, very reasonable ideas that the housing market could have bottomed. I personally just think it’s way too early to make that call. I’m not ready to say that there’s going to be a recession, or that there’s going to be lower inflation well into this year. But people who are forecasting that out, there are fundamentally sound reasons why they are saying that.
Okay, so that’s scenario one and two. Scenario three is higher inflation with a recession. So remember, scenario one was low inflation, no recession. Scenario two, low inflation, yes recession. Scenario three, we have higher inflation with a recession. Now, this will probably keep mortgage rates in my opinion close to where they are right now, because higher inflation means that the fed will raise interest rates higher. That puts upward pressure on mortgage rates. But a recession, as we just talked about, puts downward pressure on mortgage rates. And so these might in my mind cancel each other out depending on the severity of the recession, depending on the severity of the higher inflation. You could see mortgage rates stay sort of close to where they are.
Now, scenario three could happen, but the trajectory of inflation does not make it look like this is one of the more likely scenarios right now. We’ve seen inflation drop several times, seven months in a row or something. And so I think personally it could go back up, inflation, but it would take another geopolitical shock. Like a year ago inflation was starting to look like it could go down, and then Russia invaded Ukraine. That sent inflation up way, way higher on top of all the other causes of inflation. That was just sort of one more catalyst. We’re now seeing the supply side shock, a lot of the money printing has slowed down, and so we’re starting to see inflation get under control. But there’s a lot of geopolitical turmoil right now, and we’re seeing balloons, they’re shooting down stuff left and right. Who knows what’s going to happen, and if that continues that could put other inflationary pressure and lead to scenario three, which again, is higher inflation with a recession, probably keep mortgage rates close to where they are now.
So I think those are the most likely scenarios. The three things that could happen. I don’t know which one’s going to happen. I personally think one or two are the more likely ones, because inflation has shown signs of coming down. I just don’t know if there’s going to be a recession or not, but I just want to be clear that if there is a recession, there is a good chance that the housing market will rebound relatively soon, because mortgage rates will probably go down. And I know some people think, oh, when there’s a recession people don’t want to get into the housing market. I personally believe that the housing market is really about affordability right now, and that if mortgage rates make it more affordable for people to buy, even in a recessionary environment, we will see demand go back up.
So that’s just, those are three scenarios. You can decide for yourself what you think. There are probably other scenarios, those are just the three that I think are the most likely. There’s obviously a fourth scenario here which is higher inflation without a recession, but that to me just seems very unlikely. If inflation starts going back up, we’re almost certainly going to go into a recession. I could be wrong about that, but I think that is much less likely. So to me, I still think that it is possible that the housing market is bottomed, but unlikely. I think personally, I’ve been saying this for a while, but I think the first half of 2023 is going to be more of the same. We’re going to see a lot of mortgage rate volatility. We’ve already seen it come up a little bit off of where it was in January, and I think with that volatility, people are not going to jump back into the housing market as enthusiastically as they may in the second half of 2023, depending on what happens with inflation and recessions.
So I still think the most likely scenario is that housing prices fall in 2023 but don’t crash, but that’s just my opinion. As things develop, we’re seeing new data come out every single day. And as things develop, I am going to continue to share with you what is going on so you can make decisions for yourself, and I’ll share my opinion. Hopefully I’m right, a lot of times I’m wrong. But my goal with these types of episodes and sharing this information is to help you understand the different scenarios that could happen. You may think scenario one is the most likely, or scenario three is the most likely, or whatever it is. My hope is that you can help understand some of the macroeconomic, some of the behavioral elements of what’s going on in the housing market and the economy right now, so you can make your own informed decisions.
With that, I am going to get out of here. Thank you so much for listening. If you have any feedback or questions about the show, you can always hit me up on Instagram where I’m @TheDataDeli. We will see you next time for the latest episode of On the Market.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire BiggerPockets team.
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