One of the most remarkable developments in the post-pandemic economy has been the sharp rise of the housing market. Despite initial pandemic fears, people with means rushed into the real estate sector in 2020, inherently driving up home prices. The Federal Reserve also dramatically reduced benchmark interest rates, spurring acquisitiveness.
But what the Fed giveth, it taketh away. When the central bank started shifting its policy toward hawkishness, the housing market began to absorb the move. Recognizing that the window to participate in the red-hot real estate sector could be closing soon, home listings spiked in May.
In theory, housing prices should continue declining throughout this year — and perhaps into 2023. For one, higher borrowing costs significantly impede affordability. Second, mortgage lenders will likely not approve as many applicants as the economy slows down (and possibly risks a recession), thus contributing to layoffs in the lending segment. Finally, home sellers are clearly seeing the writing on the wall. That’s driving competition as homeowners look to secure deals amid the declining environment.
That said, not everything points to a negative outlook for the housing market.
The Optimistic View of the Housing Market
When it comes to determining the trajectory of home prices, urgency may be the key factor. Despite some slowdowns against early spring 2022 conditions, Selma Hepp — the Deputy Chief Economist for CoreLogic — believes the “market will continue to see relatively strong demand from buyers and an elevated rate of home price growth.”
Ralph DiBugnara, President of Home Qualified, seems to agree with Hepp. He says that the “summer market will stay mostly high because of an increased urgency to buy.” Essentially, fears of further rate hikes may motivate prospective buyers to still take the plunge into the housing market now. DiBugnara commented further:
“Fortunately, we are not in a housing bubble. Yes, there has been a huge demand for homes, but banking regulations after the 2008 market crash are much more restrictive and have remained that way.”
Home Prices Must Reflect Realities
Nevertheless, many people believe it would be unusual for major economic and monetary pivots to not affect home prices. One of those experts is realtor Jason Gelios. Gelios had the following to say, per Bankrate:
“Real estate will continue to transition away from sellers and favoring more buyers as we progress through mid- to late 2022, with a slight increase in the number of homes that hit the market.”
Bankrate Chief Financial Analyst Greg McBride also says that, while “the market is cooling, prices are not necessarily dropping.” The analyst continues, “We will still see home price levels that are 15 to 20 percent above what a home would’ve sold for six to 12 months ago.” In other words, the housing market could have more value to give up.
Capital Economics supports this notion. It forecasts that — because of mortgage rates rising above a key affordability threshold — annual house price growth “will fall to -5% by mid-2023, followed by a gradual recovery to 3% by end-2024.”
So, those playing the long game in the market could be rewarded over the next year.
A Lesson From the Past
Still, one nagging point about home prices is that it may not be wise to give complete credence to experts whose livelihoods are tied to the resilience of the housing market. Experts can be wrong, too — sometimes dead wrong.
Back in October 2005, former Fed chair Ben Bernanke said that, while home prices were unlikely to rise at that time, there was “no housing bubble to go bust.” Perhaps, amid the great housing market debate brewing today, it’s best to trust basic economic principles and good old-fashioned common sense.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.