What is the Consumer Sentiment Regarding What is Going on in Real Estate?

The Consumer Survey of Home Prices is a monthly poll conducted by Fannie Mae in which consumers are asked whether they expect home prices to rise or fall in the next 12 months. The survey data from December 2010 to 2022 reveals a clear trend. Entering 2023, last December, a record-high percentage of consumers anticipated a drop in home prices over the subsequent year.

Forecasts of a potential housing crash fueled this sentiment. Seven models predicted a crash, and even Fortune Magazine, on December 7th, 2022, hinted at a possible 20% decline in home prices. This could explain the surge in consumer pessimism.

Imagine attending a neighborhood barbecue with 80 people, and 20 believe home prices are about to fall. This fear can be dispelled with facts. Sharing accurate information can alleviate people's concerns about future price fluctuations.

Housing Crash is Too Fresh on Everyone’s Mind

The flurry of alarming headlines last fall and winter arose from a widespread belief among economists that homeowners would panic and flood the market with their properties. Many thought that with rising mortgage rates and looming recession talks, people would fear a repeat of 2008 and rush to sell their homes, causing an oversupply and destabilizing the market. Bill McBride addressed this directly. In October 2022, after noting a sharp increase in housing inventory, he predicted 7 years of depreciation, with a possible 10% decline in nominal prices.

Inventory is still a Challenge

However, the inventory surge of 2022 turned out to be a false alarm. Some sellers had hastily listed their homes, likely recalling the housing price downturn of 2006 and the subsequent recession and anticipating a flood of foreclosures due to the end of the moratorium. This expectation was also off the mark. A comparison of foreclosures in the first six months of each year shows that current levels are far below those of 2008, 2009, and 2010.

Housing Crash Unlikely

Bill McBride, who accurately predicted the 2008 crash and received much recognition for his insights, made a stark observation in November of 2008 about foreclosures, stating that they would reach record levels and would be "literally off the chart." Contrastingly, just a week or two ago, he asserted, "There will not be a foreclosure crisis this time." This era of fear is behind us.

But What's Next for Home Prices?

The pattern we observed last year is relatively straightforward. The housing market heated up early in the year underwent a correction, and is now returning to a more balanced state. When we examine major price indices, such as Case-Shiller, FHFA, and CoreLogic, they all reflect the same trend, albeit with slight differences in data. FHFA only considers government-sponsored loans, while Case-Shiller encompasses a broader range of loans. Despite these differences, the general trend is consistent: a solid first half of the year followed by a correction and a subsequent rebound.

If you're skeptical about those three indices, consider Zillow, Black Knight, and Freddie Mac, which all echo the same sentiment. Last year's appreciation rates were too high, leading to a correction, and now the market is recovering. Some might argue that specific needs, like Austin, Texas, or Boise, Idaho, are still lagging or point to cities like San Francisco or San Diego as examples. It is correct some metro areas have yet to fully recover to their peak levels since June last year, but let's consider the bigger picture beyond just the past year. If someone purchased a house a year ago intending to sell it now, that would have been a questionable decision regardless of market conditions. Looking at the three years prior, buying a house made perfect sense. And even for those who purchased at the height of the market last June, their mortgage rate of 5.04% means that their monthly expenses are lower than if they had bought a house now. They're in the proper position, and if they stay in the place, they'll eventually recoup any lost equity.

We are on Stable Grounds

People are propagating fear, but I'm unsure if it's warranted. Andy Walden says, "There is no doubt that the housing market has reignited from a price perspective. Firming prices have now fully erased the pullback we tracked through the last half 2022." He's referring to the national level. "And lifted the seasonally adjusted Black Knight home price index to a new record high in May." We've already regained the lost ground from a national perspective. While I acknowledge that not all cities have recovered, it's essential to consider the broader context. 

Expert Real Estate Predictions

Last year, many forecasters predicted significant declines in housing prices, with some suggesting drops of up to 20%. However, these predictions were mainly off the mark. The original forecasts, made in December of the previous year, showed a variety of opinions: the Mortgage Bankers Association predicted a slight drop of less than 1%, Fannie Mae said 1.5%, Morgan Stanley 4%, AEI expected 15-20% decline, Zillow a decrease of less than 1%, while CoreLogic expected a 3% increase. However, the updated forecasts are pretty different. MBA now expects prices to be flat, Fannie Mae expects a 4% appreciation, and even AEI, which had predicted a significant decline, now expects a 6% increase. There was considerable confusion in the market last year, but now most forecasters anticipate a good year with around 5.5% growth. However, we should remember that appreciation varies seasonally, and as the month-over-month number decreases, headlines may wrongly suggest that prices are coming down. It's essential to stay ahead of this narrative and provide accurate information.

As you can see, most of these organizations have shifted from a negative to a positive outlook for the housing market this year. This turnaround highlights the confusion in the market last year. AEI's dramatic change from a potential 20% loss to a 6% gain is particularly striking.

We have a Normal Appreciation Rate, Unlike What Happened during the Pandemic

But it's important to remember that the month-over-month appreciation may be lower than in previous months as we go through the rest of this year. This doesn't mean house prices are falling; they're not increasing as quickly. Unfortunately, headlines will likely misrepresent this trend as a decline in prices. This is why it's crucial to be aware of the data and not be swayed by misleading headlines.

Housing prices will remain stable due to the current inventory situation. Yes, inventory has increased recently, but if we compare it to the same week in 2022 and 2019, it's clear that there's still a shortage of available homes. The market is resilient, with buyers undeterred even by 7% mortgage rates. We desperately need more listings. Lawrence Yun stated, "There are simply not enough homes for sale. The market can easily absorb a doubling of inventory."

What is happening with the Mortgage Rates?

Regarding mortgage rates, Fannie Mae, the Mortgage Bankers Association, and the National Association of Realtors all sources anticipate mortgage rates will be close to 6% by the end of this year. Over the following year, rates will drop gradually into the mid-5% range. This will be crucial for the market. Sellers locked in with 3 or 4% mortgage rates may not be willing to upgrade to a 7% rate. However, a low 6% or even 5% rate may be more palatable. A recent Zillow survey confirms this prediction.

Chairman Powell is taking action because he aims to reduce inflation to 2%. That's the level they are comfortable with. Once we reach 2% inflation, he will likely ease up on the measures. When that happens, we can expect the 10-year treasury yield to decrease slightly and the spread - the difference between the 10-year treasury yield and the mortgage rate - to drop significantly. Historically, this spread has been under two, or at least averaged well under two, for the past 50 years. Currently, it's over three.

Recently, we've seen the inflation rate plummet. Similarly, thus historically speaking, the 30-year fixed-rate mortgage will follow suit. We can observe indicators that suggest it's pretty close, and I believe that is the case now.

Most importantly, we must not let fear dictate our actions. We must stay informed and educate consumers about the current state of the market. By doing so, we can help alleviate the anxiety and uncertainty that may be prevalent in the market.

Mortgage Rate Projection

Mortgage rate projections for the upcoming four quarters, from Q4 2023 to Q3 2024, indicate a consensus among Fannie Mae, the Mortgage Bankers Association, and the National Association of Realtors. The average of these projections suggests that rates will be close to six by the end of this year and likely break into the fives next year. This could be significant for sellers currently locked in at three or four percent mortgage rates and may be more willing to sell if rates drop to the lower six or five percent range. A recent Zillow survey supports this assertion.

Once rates drop into the 5% range, we can expect the market to heat up significantly.

What is happening in Los Angeles Real Estate Market?

Curious about the current state of the Los Angeles housing market? As of July 2023, the median home price has surged by 4.4% from the previous year, reaching an impressive $1 million. On average, homes spend approximately 37 days on the market, a slight increase from the 35-day average last year. The market saw 1,475 homes sold in July this year, showing a decrease from the 1,817 homes sold during the same period last year.

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