As the housing market moves into the spring months, when the majority of transactions typically occur, things are looking a lot like 2019, said Mark Fleming, chief economist at First American.
The economy is growing, household formation is high and there is a shortage of properties for sale, just like the year before the Covid-19 pandemic broke out, Fleming said.
A look at the spring 2019 market is a better gauge than year-on-year comparisons, when the lowest-ever mortgage rates pushed home sales to a 15-year high, he said. And comparisons to the spring 2020 market, when most of America was in lockdown, don’t work either, Fleming said.
“Perhaps a more telling point of comparison isn’t the home buying season of last spring, and certainly not 2020, but rather the 2019 housing market,” Fleming said. “Examining the changes since the pre-pandemic spring housing market provides a helpful perspective on the spring 2022 home buying season.”
Although mortgage rates are currently about a percentage point above their April-June 2019 average, according to Freddie Mac data, other factors such as budgeting are a throwback to pre-pandemic times, Fleming said.
“Household formation, a primary and long-term driver of home demand, has continued to rise, contributing to nearly 273,000 prospective home sales since March 2019,” Fleming said.
In addition, the rise in home prices caused by record-low mortgage rates over the past two years will tempt some homeowners to sell their existing homes and buy higher-priced ones, he said.
“A sharp rise in home prices usually encourages more existing homeowners to move,” Fleming said. “When homeowners gain equity in their homes, they may be more likely to consider using the equity to purchase a larger or more attractive home.”
The housing market remains constrained, with buyers outnumbering sellers like it was in 2019, Fleming said. New home construction still faces many challenges as higher material and labor costs and supply chain issues remain, he said.
The inventory of existing homes for sale fell to an all-time low of 850,000 in January and February before rising to 950,000 in March, according to data from the National Association of Realtors.
That’s partly because owners are staying in their homes longer, Fleming said. Since the pandemic began, remodeling and updating the condition of existing homes has skyrocketed as people started working from home, he said.
“The majority of our housing supply for sale is from existing homes, and existing homeowners are staying there,” Fleming said.
The average length of time people have stayed in their homes has set new records, rising to 10.5 years in March, up from 9.75 years in spring 2019, he said.
“The longer people live in their homes, the fewer and fewer houses come up for sale, compounding housing shortages – you can’t buy what’s not for sale, and you won’t sell if you can’t find anything better to buy” , Fleming said. “Homeowners who stay have reduced the housing market potential by 288,000 potential home sales compared to March 2019.”
Despite mortgage rates rising rapidly in the first three months of 2022, home purchasing power, meaning how much people can afford given their income and current interest rates, is now 5.6% higher than in March 2019, which was partly due to an increase in household income, Fleming said.
“Increased purchasing power for homes increased the housing market potential by about 113,000 potential home sales in March compared to 2019,” Fleming said.
A modest drop in demand as a result of this year’s hike in mortgage rates means there are slightly more homes for sale, said Mark Vitner, senior economist at Wells Fargo Securities. Inventories remain very tight but are up 11.8% in March, he said.
Measured as a “monthly supply” number, ie the time it would take to sell all the properties, inventory rose to two months in March from 1.7 months in February, according to NAR data.
“For context, an average supply of four to six months usually indicates a balanced housing market,” Vitner said. “The slight inventory improvement is welcome news for potential buyers who are becoming increasingly discouraged by the lack of properties for sale and intense competition.”
Most real estate forecasters are projecting a decline in home sales in 2022 compared to 2021. For example, Fannie Mae, the nation’s largest mortgage lender, issued a forecast Tuesday that existing home sales are likely to fall 8.6% this year, compared to an 8.5% gain in 2021, which saw the most home sales since the last housing boom peaked in 2006.
“While comparisons to 2021 may not flatter the housing market entering the spring 2022 homebuying season, historical context is important,” First American’s Fleming said. “So far the housing market in 2022 looks a lot like 2019. The last few pandemic years have been anomalous, so comparing today’s housing market to pre-pandemic times provides helpful insights.”