Housing taking a peak?

Posted by on November 20th, 2018

After rapid acceleration for most of the past two years, home prices in many parts of the country are slowing as interest rates rise and inventory in some markets increases.

Evidence that the market is cooling can be seen in price drops. In October, 31.3 percent of homes for sale had at least one price drop of more than 1 percent after listing, 6.3 percent higher than last October’s level of 25 percent.

Ten years after the financial crisis, the notion of a housing “peak” – which would naturally be followed by a downturn – seems downright spooky. Is it time to start talking about a “housing bubble?”

Most economists say no. Historically, price crashes are usually caused by over-supply. In contrast, the present moment is probably a simple “cycle top” – the kind of correction normal in any consumer market.

There’s widespread agreement among housing-watchers that the biggest issue in the market is the supply-demand imbalance.

As supply has been stifled for several years, it has pushed home prices higher. Add that to rising mortgage rates, and at some point, demand wanes.

Overvalued markets feel a cycle top correction first. In these areas, inventories rise modestly and home price growth slows.

Right on cue, several West Coast metro areas reported an uptick in housing inventory in the third quarter of 2018, while the rest of the nation remained flat. In the previously scorching market of Seattle, WA, almost half of listed homes had price drops.

Some who bought recently in pricey markets may have very little equity in their homes, either because they made small down payments or because they’ve taken their equity out.

But generally, homeowners have more equity than at any time in American history – a good “cushion” in case of a downturn.

The National Association of Realtors predicts nationwide prices to remain fairly neutral in 2019, though new caps on federal deductions for State and Local Taxes (SALT) taxes are expected to have a minimal effect on prices in high tax states like California, New York, New Jersey and Connecticut.