Is It A Housing Cooldown, Collapse, Or Crash?

Proprietary Data Insights

Top Residential REIT Searches This Month

0 1 2
Rank Name Searches
#1 Apartment Investment and Management 2,100
#2 American Campus Communities 1,380
#3 Invitation Homes 1,218
#4 Education Realty Trust 1,026
#5 Sachem Capital Corp 996

Rents Are Out Of Control 

We’ll put the talk of a housing cooldown in perspective in a minute, but first, one thing we can all probably agree on – the outrageousness of rent prices

Across the country – in cities big and small – they keep going up. In some cases, astronomically.

New York City makes the headlines. And it should. A median one-bedroom there goes for $3,930, as of August. That’s up 40% year-over-year. The median two-bedroom in NYC costs $4,400, up nearly 47% annually. 

Break it down by borough and you get a better picture of just how tough it is for apartment seekers in Brooklyn and Manhattan:

Source: Zumper

$5,283 for a two-bedroom in Manhattan. $4,506 in Brooklyn. Incredible. 

From there, the other usual suspects show up on the top ten list. Places such as San Francisco, where the median one-bed goes for $3,040, Miami ($2,520), Los Angeles ($2,450), and Washington, DC ($2,370). 

However, it’s these small, seemingly random places really driving the national picture. 

At $1,540, the median one-bedroom in Fresno, CA, costs 40% more than it did at this time last year. That’s the biggest increase in the country and can be attributed to people leaving more expensive parts of California for less expensive housing. 

Where Is Rent Down?

Out of the top 100 cities Zumper keeps track of, only two posted year-over-year decreases on the median rent for a one-bedroom: Des Moines, down 12% and Cleveland, off 5.4%. 

For homebuyers, prices – almost across the board – are actually cooling. However, as The Juice details if you scroll with us, this isn’t necessarily making things affordable.

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Housing

Is It A Housing Cooldown, Collapse, Or Crash?

Key Takeaways:

  • It has become all but official, housing prices have started to and will likely continue to come down. 
  • Some of the nation’s most expensive markets are leading the decline. 
  • However, this doesn’t necessarily make things more affordable. 

 

So, it depends on who you get your data from and how and when they measure it to see exactly what housing prices are doing. 

One of The Juice’s go-to places for housing info is Bill McBride’s excellent CalculatedRisk newsletter on Substack. So we’ll start there. 

Among other things, Bill does a nice job putting things in perspective when people refer to us being in a housing bubble. For example, last week, he wrote

It has been over 16 years since the bubble peak. In the Case-Shiller release yesterday, the seasonally adjusted National Index (SA), was reported as being 66% above the bubble peak in 2006. However, in real terms, the National index (SA) is about 16% above the bubble peak (and historically there has been an upward slope to real house prices). The composite 20, in real terms, is about 7% above the bubble peak.

People usually graph nominal house prices, but it is also important to look at prices in real terms (inflation adjusted).  As an example, if a house price was $200,000 in January 2000, the price would be almost $339,000 today adjusted for inflation (69.5% increase). That is why the second graph below is important – this shows “real” prices (adjusted for inflation)…

Note that real prices declined in June, with nominal prices increasing less than inflation.

The Case-Shiller Composite 20 looks at prices in 20 of the nation’s largest metropolitan areas. Of those cities, prices declined in seven – Seattle, San Francisco, San Diego, Portland, Los Angeles, Denver and Washington, DC. That’s as of June 2022. You can see the downward trend nationally and in the comp 20. 

However, this cooling of the housing market – even if it leads to a collapse or crash – doesn’t necessarily make housing affordable, especially in these crazy expensive cities. 

  • According to data analytics firm, Black Knight, housing prices declined 0.77% nationally between June and July. That’s the first monthly drop in almost three years. 
  • Year-over-year, housing prices are still up 14.3%. 
  • Home prices in San Jose are down 10% in the last three months. Black Knight calls the pace of this decrease unprecedented. 
  • Decreases in some of the other aforementioned big cities: Seattle (-7.7%), San Francisco (-7.4%), San Diego (-5.6%), Los Angeles (-4.3%) and Denver (-4.2%).

For more perspective, Realtor.com says the national median price active listings dropped in July to $449,000 from $450,000 in June. But it’s still up 16.6% year-over-year. 

Source: Realtor.com

Still Not Affordable

For even more perspective. 

Let’s say a couple months ago, you came across a $1.1 million home in Los Angeles. At the time, you could maybe get a 5.0% interest rate on a 30-year mortgage. 

With 10% down, you’d be looking at a $990,000 mortgage loan. 

Your payment would have been $5,315 a month. 

Fast forward to today. You read the headlines about this cooling housing market, even and especially in places such as LA.

Take Black Knight’s estimate of a 4.3% decrease in prices in LA and that $1.1 million properly now costs $1.053 million. We’ll say the seller is antsy and lowers the asking price to a psychologically alluring $999,999. 

Assuming this doesn’t trigger a bidding war, with 10% down you’d be on the hook for a $900,000 loan. At a 5% interest rate, your monthly payment would be $4,831. 

However, as of the end of August, interest rates are back up to 6%. This takes your monthly payment to $5,393, which is actually higher than it was before this recent cooldown. 

The Bottom Line: Of course, this is a hypothetical example. And things change by the minute in this housing market. We didn’t even discuss coming up with a six-figure down payment or covering the other costs of home ownership such as property tax. 

That said, this exercise shows that affordability is all relative. If rents come down, only a handful of people will benefit. Same for people looking to buy. It all depends on just how much you have been priced out of these markets over the last year.

 

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