2023 has been “more of the same” with housing news, and interest rates. A lot of swirling rhetoric, and experts predicting ups and downs. The housing market IS expected to experience a correction it IS expected to be different from what was seen in 2006. The primary reasons for this include:
- Landlord behavior: In a falling market, landlords are often in a better position to sell than homeowners who live in the houses they own. Landlords do not need to find another place to live if they sell their property, which can make them more willing to sell in a falling market.
- Increased availability of information: Today, buyers and sellers have access to a wealth of information about the real estate market that was not available in 2006. This makes it easier for buyers and sellers to make informed decisions about the housing market, reducing the risk of price bubbles and housing market corrections.
- Lack of predatory loans: The Consumer Financial Protection Bureau (CFPB) has implemented new housing rules that have helped to reduce the risk of predatory lending practices and to protect borrowers. This has helped to stabilize the housing market and reduce the risk of a similar correction to what happened in 2008.
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Sticky Market
As the mortgage interest rate in the United States rises to 6%, many analysts are forecasting a decrease in the country’s house prices. This expected decline is believed to be small, and is predicted to take place over the next 18-24 months.
For several years, the US housing market has been on an upward trajectory, with house prices rising steadily. However, the recent correction in mortgage interest rates will naturally lead to a corresponding housing value correction.
With artificially low interest rates of the last few years coming back to reality, it has reduced what was perceived to be buying power. Now, important to note that, mortgage rates were artificially low due to a combination of factors, including government intervention and economic uncertainty.
The Federal Reserve
One of the main reasons was the Federal Reserve’s monetary policy response to the pandemic, which involved lowering its benchmark interest rate to near zero to stimulate the economy. This made borrowing money, including taking out a mortgage, cheaper.
Additionally, the pandemic created a lot of economic uncertainty, which led to a flight to safety by investors. Many of these investors bought U.S. Treasury bonds, which are considered a safe haven asset. The increased demand for these bonds pushed down the yields, and mortgage rates tend to follow the yield on 10-year Treasury bonds.
Demand Decrease
When demand decreases, prices are likely to fall. However, many analysts believe that the decline will be small and gradual, and that the US housing market will remain strong.
One reason for this optimism is that house prices tend to be “sticky” on the downside. This means that, when prices start to fall, they tend to do so slowly, rather than collapsing rapidly. This gives homeowners and potential buyers time to adjust to the changes, and can help to prevent a sudden drop in prices.
Another factor to consider is that the US economy. If it can correct shape, with low unemployment and steady economic growth, this could help to counteract the negative effects of higher interest rates, and could limit the extent of any price decreases.
This is Not 2006
In 2006, the US housing market experienced a perfect example of sticky house prices. Despite the fact that the number of homes sold nationally fell by 8%, house prices actually went up by 7%. This was due to the fact that homeowners and potential buyers were slow to adjust to changes in the market, and prices were slow to fall as a result.
Despite the decrease in the number of homes sold, the US housing market remained strong in 2006, with prices continuing to rise. This was largely due to the strength of the US economy, which was experiencing low unemployment and steady economic growth.
However, this trend did not last for long. In 2007, the housing market began to experience significant challenges, and house prices finally started to fall. The collapse of the subprime mortgage market, coupled with the overall slowdown in the economy, caused a decrease in demand for homes, and prices began to fall rapidly.
This example of sticky house prices in 2006 demonstrates how, even when demand for homes decreases, prices can remain high for a period of time. It also shows how the strength of the overall economy can help to offset the negative effects of declining demand for homes.
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While the rise in mortgage interest rates is expected to have a negative impact on US house prices, the decline is predicted to be small and gradual. House prices are believed to be sticky on the downside, and the strong US economy should help to mitigate any negative effects. As a result, the US housing market is expected to remain strong, and any decreases in prices are unlikely to begin until next year.
Delayed Fall, If At All
House prices don’t fall right away for several reasons. One of the main reasons is that some sellers will decide not to sell if they can’t get the price they want. These sellers are often trying to hold out for a higher price, and are not willing to accept a lower offer. This means that the number of homes on the market may decrease, even as demand decreases, and prices may not fall as a result.
Another reason that house prices don’t fall immediately is because some sellers emotionally have trouble accepting that they missed the peak of home prices. These sellers may believe that the value of their home will eventually recover, and they may be reluctant to sell at what they perceive as less than market value. This can lead to a situation where there are fewer homes available for sale, even as demand decreases, which can prevent prices from falling right away.
FOMO Realized
Finally, some sellers may not be able to sell their homes because of the difficulty in finding a buyer who is willing to pay the price they want. This can create a backlog of homes that are not being sold, which can keep prices from falling in the short term.
In a falling housing market, landlords are often in a better position to sell their properties than homeowners who live in the houses they own. One of the key reasons for this is that landlords do not need to find another place to live if they sell their property. In contrast, homeowners who live in the houses they own would have to go and find a new place to live if they sell.
This difference in circumstances can have a significant impact on the willingness of landlords and homeowners to sell in a falling market. Landlords are often more motivated by profit and may be more willing to accept a lower price for their property if they can’t make the returns they want. This increased willingness to sell can help to bring prices down more quickly and smoothly.
In contrast, homeowners who live in the houses they own may be more emotionally attached to their homes and may be less willing to sell if they can’t get the price they want. This reluctance to sell can limit the supply of homes available for sale, even as demand decreases, and this can prevent prices from falling in the short term.
Homebuyer tip:
Access to Information
In recent years, the availability of information about the real estate market has greatly increased compared to what it was in the past. In 2006, finding the sold prices of houses in your neighborhood was not always easy, but today, prices can be found all over the internet. This increased availability of information makes it easier for buyers and sellers to make informed decisions about the housing market, and can help to reduce the risk of price bubbles and housing market corrections.
Credit Bubble
The early 2000s were marked by a credit bubble, in which subprime loans were widely available and encouraged by lenders. These loans were designed for people with lower credit scores who might not have otherwise qualified for a mortgage, and they allowed many people to buy homes who might not have been able to do so otherwise. However, these loans often came with higher interest rates and greater risk, and many borrowers ended up defaulting on their loans, which contributed to the housing market collapse of 2008.
Borrower Protections
Today, the situation is quite different. The Consumer Financial Protection Bureau (CFPB) has implemented new housing rules that have helped to reduce the risk of predatory lending practices and to protect borrowers from the types of loans that led to the housing market collapse in 2008. These rules have helped to stabilize the housing market and to reduce the risk of a similar correction in the future.
Now What?
So, what is the move? With the current market conditions, you have an unprecedented opportunity to secure a home while others are scared, and with far less competition than in recent years. This is the perfect time to take advantage of the market decline and turn your vision of home ownership into a reality. The coming housing market correction is expected to be different from what was seen in 2006 due to the increased availability of information, the behavior of landlords, and the lack of predatory loans. These factors are likely to impact the speed and direction of the correction, making it less sticky and potentially reducing the risk of a full-blown market collapse. Start your preapproval application with Forward Loans today. At Forward Loans, you can rest assured that we have your back. If rates come down within the next 36 months, we will refinance your home for free, so you can enjoy the comfort and stability of homeownership for years to come.
Michael Creel is a veteran in the marketing industry, with a proven track record of helping brands in the real estate and lending space build a strong presence across a number of social platforms.
He’s built and implemented several marketing strategies and installed the digital and social framework to support several mortgage teams, loan officers, realtors, multiple new home builders as well as various brands in other spaces.
In 2020 Michael opened Forward Loans, a duly licensed mortgage brokerage, offering digital strategies and marketing automation to loan officers, while focusing on process and service for clients and employees.