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Housing Market Outlook: An Adjustment to Post–Pandemic Normal

Housing Market Outlook

According to First American Chief Economist Mark Fleming, the housing market outlook is experiencing an adjustment to the new post-pandemic normal. This new normal involves higher mortgage interest rates. Fleming also predicts a drop in home sales from the pandemic highs.

After analyzing potential-existing home sales for June 2022, the sales rate dropped to a seasonally adjusted annualized rate of 5.47 million. This level is 2.5% lower than May’s rate and 13.1% lower than June 2021. The rate closely matches the June 2019 rate, the last same month’s sale rate from the pre-pandemic days.

Fleming added that the housing market outlook remains strong despite dropping from the astoundingly high rate observed during the pandemic. Many people are curious about why, and Fleming stated that looking at the fundamental market conditions that drive the potential existing home sales offers insight.

There are several fundamental measures that analysts like Fleming review. One of those measures is home buying power. Another way to describe this measure is how much home a buyer can afford based on their annual income and the current 30-year rate for fixed mortgages.

In June 2022, mortgage rates were 2.5% higher than in June 2021. Household income for the same period was constant. This lowered home buying power by more than $123,000. The estimated increase in household income for all of 2022 is 4.4%. While this will positively impact an individual’s home buying power, it will still result in a $108,000 loss compared to June 2021. Fleming stated that the decline in home affordability and buying power may have caused the loss of 522,000 potential existing home sales.

A second fundamental measure examined by Fleming is the standard of credit for issuing a mortgage loan. Lenders have tightened their benchmarks over the past few months. Increasing economic uncertainty and tighter federal fiscal policies may have cost the housing market outlook to lose 458,000 home sales.

Not all the fundamentals hurt the housing market outlook. Rising home prices deliver a positive impact. When homeowners build equity, they’re more likely to use it to buy a more significant or nicer home. If their equity is low, they feel locked into place. Low equity makes people stay where they are. The appreciation of home prices may have increased the potential home sales by 193,000 in 2022 compared to 2021.

The formation of more households in 2022 has also positively impacted the demand for existing homes. An estimated 43,000 potential home sales occurred in June 2022 compared to June 2021 due to newly formed households.

Homebuilders have boosted their rate of building new homes. The increase in new inventory has also given a lift to housing potential. When more homes are available, buyers feel more confident about selling their existing homes. The increase in newly constructed homes added about 1,400 potential home sales in June 2022 compared to June 2021.

While the 2022 housing market outlook differs considerably from 2021, it looks more like 2019. The return to pre-pandemic levels of demand, supply, and affordability provides hope and motivation to home buyers and sellers.

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