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No Worries… Home Prices Coming in for a SOFT Landing

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Home prices have appreciated considerably over the last five years. This has some concerned that we may be in for another dramatic correction. However, recent statistics suggest home values will not crash as they did a decade ago. Instead, this time they will come in for a soft landing.

 

The previous housing market was fueled by an artificial demand created by mortgage standards that were far too lenient. When this demand was shut off, a flood of inventory came to market. This included heavily discounted distressed properties (foreclosures and short sales).

Today’s market is totally different. Mortgage standards are tighter than they were prior to the last boom and bust. There is no fear that a rush of foreclosures will come to market. The Mortgage Bankers’ Association just announced that foreclosures are lower today than at any time since 1996.

Case Shiller looks at the percentage of appreciation as compared to the same month the year prior. Here is a graph of their findings over the last ten months:

No Worries… Home Prices Coming in for a SOFT Landing | Simplifying The Market

As we can see, home price appreciation is softening as more inventory comes to market. This shows that real estate prices are not crashing, but merely returning toward historic appreciation numbers of 3.6% annually.

Bottom Line

Home prices are leveling off. Long term, that is a good thing for the housing market.

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Why A Normal Market is Just What We Need

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The housing market has been hot for a while now. Homes have been flying off the shelves as fast as they have been listed. Buyers have been competing in bidding wars just to find a home to buy, let alone find their dream home.

 

This ‘seller’s market’ has driven home prices to new heights. Home price appreciation averaged over 6% across the country.

However, home price growth has recently started to cool down. The latest report from CoreLogic shows that home prices have only risen by 4.7% over the last 12 months.

Many buyers and sellers planning to enter the housing market this year have started to wonder if we are headed towards another housing crash. Ralph McLaughlin, Deputy Chief Economist at CoreLogic, recently stated in an interview,

“There’s no reason to panic right now, even if we may be headed for a recession. We’re seeing a cooling of the housing market, but nothing that indicates a crash.

The real elephant in the room here is housing supply.”

The simple answer is we are returning to a ‘normal’ market. The inventory of homes for sale more closely matches the demand in the market. The added supply means fewer buyers are outbidding each other. Therefore, prices are experiencing less upward pressure. McLaughlin went on to explain,

“If there are a lot of homes on the market and suddenly no one wants to buy them, you’ll get into a downward spiral of price competition. Right now, however, we’re in the opposite situation, there isn’t an over-abundance of homes on the market.”

As more renters looking for their piece of the American Dream enter the housing market, demand for housing will continue to grow. The Joint Center for Housing Studies at Harvard University estimates over 30 million new households will enter the market from now through 2040.

“There’s the natural life cycle of young people getting older and starting to do adult life things which include … buying a house and that’s a lot of potential inertia that could last indefinitely.”

Bottom Line

Home prices will start to appreciate by historical norms as we continue to head towards a more ‘normal’ market, rather than the over 6% seen over the course of the last couple of years. This is great news! Homeowners looking to sell their home will have buyers, as more buyers will be able to afford them!