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  • Writer's pictureHugh F. Wynn

State of the Housing Bubble: Home Sales are Down, But Not Out

We knew the housing bubble couldn't expand forever, especially with inflation and mortgage interest rates rising and the end of the summer selling season. I delved into the latest details in the Houston real estate market, which I follow rather closely, and found that the numbers aren't as bad as I expected. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Down, but Not Out

The Houston Association of Realtors (HAR) recently published a graphic showing changes in local sales volume in August 2022 by price category versus a year ago (August 2021):

HAR noted that transactions in Houston are happening at reduced - but still healthy - levels.

Just the Facts

The HAR chart leads me to believe that increased prices and mortgage rates have made home buying unaffordable for most folks, and that the remaining sweet spot is the $500,000-$999,999 price range (a spot that most potential buyers don’t fit into). Only 39% of Houston households earned the “minimum annual income” needed to buy a medium-priced house in the second quarter of 2022, down from 53% a year ago. That’s a dramatic change.

Here's some facts that tell the story of the housing market's current situation (as of August 2022):

  • Home sales have fallen for five months running. The primary reasons for this trend are elevated home prices and mortgage rates.

  • August home sales fell 16.9% versus a year ago, but prices continue to rise.

  • The median price increased nearly 11% to $341,950. The standing record is $354,440 in June 2022.

  • The average price is $411,671. The standing record is $438,591 in May 2022.

  • Average home prices are still 8.7% higher than a year ago.

  • Homes are on the market an average of 31 days versus 27 days a month ago. Although very few buyers are paying the asking price, they’re still buying.

Mortgage Payment Increases

Average mortgage interest rates on a 30-year fixed loan on a medium-priced home hit 5.89% (now over 6%) last quarter. This pushed typical monthly mortgage payments up by 60% nationwide to $2,230 (including taxes and insurance) compared to a year ago. In the second quarter of 2021, a typical monthly payment in Houston would have been $1,660.

A positive note: Houston buyers have more homes to select from this year versus a year ago (2.5 months of supply versus 1.7 months). A balanced market which favors neither buyer nor seller is considered six months. In short, home prices should continue to creep up as long as inventory remains tight. Never stop paying attention to supply and demand.

Demand-Driven Inflation

The Federal Reserve continues to tighten monetary policy to curb inflation. In fact, a third straight .75-point rate increase was implemented as expected last week. Ten-Year Treasuries are roaming above 3.5% and mortgage rates are expected to increase right along with them.

In August, core inflation rose .6% across a full range of products and services and appears to be demand driven. People are spending money despite inflation, which is harder to combat than supply-driven inflation. Why? Jobs are plentiful. Folks are receiving attractive job offers and also raises because employers are having to boosts wages to attract workers.

Also, folks still have money from Federal Government largess that many saved and are now spending. This tells me the Fed will continue raising fed funds rates through year end and into 2023, which will exert continued upward pressure on mortgage rates. If someone needs to buy a house, it probably makes sense to get serious about a purchase.

Risky ARMs

For those who “need” to make a buy decision in the presence of continuing mortgage rate hikes, adjustable-rate mortgages (ARMs) may become more attractive. ARMS involve buying a house with lower monthly payments now with refinancing in mind down the road if and when rates improve.

Without question, adjustable rate loans are riskier, but with housing affordability at its lowest since 1989, according to the National Association of Realtors (NAR), folks who can’t afford to buy using a fixed-rate mortgage, but still want their own home may not have many alternatives.

In 2008, lenders did their part in creating the Great Recession mess by making ARM loans with ridiculously low “teaser rates” that tempted subprime borrowers into buying unaffordable homes, and we know how that turned out. According to Redfin, ARMs are now better regulated, but it’s still incumbent on prospective buyers to do the worst-case scenario math and not get in over their heads. It’s likely that mortgage rates will come down, but when? The money buyers save on the fixed portion of an ARM (hundreds or thousands of dollars) might wisely be set aside in an emergency fund to meet an unexpected variable rate adjustment that increases instead of decreases future monthly payments.

COLA Spike

Government inflation numbers for August indicate a Social Security cost-of-living adjustment (COLA) of roughly 8.7%. A final number will be revealed on October 13 by the Social Security Administration after release of September inflation data…likely the largest COLA increase since 1981.

Of course, rising Medicare premiums will take their usual significant bite out of COLAs. However, experts suggest that the standard Part B premium will rise modestly or remain flat at $170.10 per month.

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