\n<\/p>\n
The <\/strong>housing market<\/strong><\/a> crash may be over already.<\/strong> With mortgage rates<\/strong><\/a> steadily dropping<\/strong>, buyer demand <\/strong>picking up, and competition creeping back in, this housing correction could have been one of the fastest and least severe downturns we\u2019ve ever witnessed. Top forecasters have hinted at the housing market bottoming out<\/strong>, with some claiming that the \u201cthawing\u201d <\/strong>has already begun\u2014but the data may point to something different. While there are signs of improvement compared to where we stood just a few months ago, some glaringly obvious data points could make this a much closer call than mainstream forecasters think<\/strong>.<\/p>\n Dave Meyer, your sandwich-eating, data-delving host, wanted to know precisely what would cause the housing market to hit its floor<\/strong>. He looks at both the demand and supply side of the housing market, touching on the variables that genuinely make a difference. We\u2019re talking about mortgage rates, housing affordability<\/strong><\/a>, loan applications<\/strong>, housing supply<\/strong>, active listings<\/strong>, and more. But you don\u2019t need a degree in Data Science to understand what\u2019s happening behind the scenes.<\/p>\n Dave will explain exactly what is (and isn\u2019t) impacting the housing market<\/strong>, what changes led to the state we\u2019re in, and four scenarios that could play out in 2023 <\/strong>that might put a nail in this theory\u2019s coffin. Betting on the housing market bottoming out? We\u2019d suggest hearing the full story before you make your next investment.<\/p>\n Dave: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our <\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hello everyone, and welcome to On the Market. I am your host, Dave Meyer, and today I am doing the show alone. We\u2019re going to be doing a deep dive into a question that has been coming up on my newsfeed like crazy over the last couple of weeks, and I\u2019ve been kind of surprised by it. And so I decided to look into this topic, and I\u2019m going to share what I\u2019ve learned about it and my opinions about it over the course of this episode.
Now the question that I researched and we\u2019re going to talk about today is, has the housing market already found a bottom? And honestly, for the last couple of months I didn\u2019t really think we were going to be talking about bottoming out of the housing market until at least the second half of 2023, maybe into 2024. But there has been a rash of headlines from reputable organizations talking about this. Just as an example, Mike Simonsen, who\u2019s the CEO of Altos Research, a pretty prominent, very reputable real estate data firm, put out an article called Has the Housing Market Already Found a Bottom, pretty straightforward. We also saw The Wall Street Journal run a headline that says The Housing Market is Showing Signs of Thawing. Yahoo and Fortune ran headlines asking if demand has already hit bottom in November, and Goldman Sachs, one of the largest banks and most prominent economic forecasters in the entire United States, actually upwardly revised its housing market forecast for 2023.
And that\u2019s really noticeable, because most forecasters, at least in the second half of 2022, were making their forecasts go down. Zillow kept adjusting their expectations downward. We were seeing other big banks, other real estate firms downward. We were seeing other big banks, other real estate firms downward. So this question is something that sort of fascinated me. Are we close to the bottom? I looked into it, and what I\u2019m going to do today is share with you the data that I found. This way, you can decide for yourself whether you think that the market has already bottomed, if it\u2019s going to start growing again, if there\u2019s much more downside risk, and I\u2019ll share my opinion with you at the end, but for most of the show what I\u2019m just going to talk about is why these businesses, why some of these reputable firms are saying that the housing market may have found its bottom.
And you don\u2019t have to agree with that. I\u2019ll let you know my opinion at the end. But I will just say that there are fundamentally sound ideas why they\u2019re saying this. It\u2019s not just fanfare and cheerleading for the real estate industry. There is actually economic and real estate data that has come out recently that has suggested that maybe the worst is behind us. I\u2019m not saying that\u2019s true, I\u2019m just saying there are some indicators that are pointing in that direction, and therefore it is worth understanding. Things are shifting and I want to help you understand what has shifted, and then you can decide for yourself if you think that means the housing market has bottomed out at all. And again, at the end I will share my opinion and let you know what I think is likely to happen.
Okay, so that\u2019s what we\u2019re going to talk about today. But before we get into that, I do want to thank everyone who wrote us a review on Apple or Spotify recently. We asked people to write reviews because it really helps us a lot here at On the Market, and we got some amazing reviews and I\u2019m really grateful for everyone who took the time to do that. We appreciate it. We read every single one of them. We appreciate your feedback. And if you haven\u2019t given a review but you love the show, we would appreciate even more of them. So thank you all for being listeners, members of our community, it is a huge help to us when you do something like that. So again, thank you. Secondly we do have to take a quick break to hear from our sponsor, and then we are going to get into our topic, has the housing market bottomed out.
All right, so when I started to look into this question of has the housing market bottomed out, I basically sorted my research into two different sides, demand side and supply side. As with all things economics, it really comes down to supply and demand. Let\u2019s talk about demand side, because I think first, because I think that is sort of what has driven market behavior over the last six months or so. Basically since May or June, when interest rates and mortgage rates start to skyrocket, we\u2019ve seen the housing market enter a correction. And that is basically because rising mortgage rates has reduced demand. People were happy to buy homes even at elevated prices when mortgage rates were 2%, or 3%, or 4%. Fast-forward to June when they went up to 5 or 6%, people could no longer afford it, and so they drop out of the housing market because they\u2019re no longer looking for a home. That reduces demand, and that puts downward pressure on housing prices. That\u2019s basically what we\u2019ve seen since May, June of 2022.
And just to give you an anecdote here, at the beginning of the pandemic, housing affordability was one of the highest it\u2019s ever been back in 2020. It was easy for people to buy homes, because prices hadn\u2019t gone up that much but mortgage rates were super low, and that\u2019s what sort of started this frenzy that went from 2020 to the middle of 2022. Now, in the second half of 2022, we actually saw that housing affordability, and there are different ways to measure this, but by one of the more reputable ways to measure it, housing affordability reached a 40 year low. And what happens when that happens, when affordability goes down is pretty obvious right? People just back out of the market. And so again, that is what we have seen.
But an interesting thing has happened since November, and that is affordability has actually started to improve because mortgage rates have gone down. Mortgage rates, the average for a 30 year fixed rate mortgage actually peaked for, so far, it definitely could still go up but so far in this tightening cycle, it peaked at around 7.4% back in November, and recently in January, it was down as low as 6%. Now, that\u2019s still double where we were a year ago, so it\u2019s not like we\u2019re all of a sudden at great mortgage rates again relatively speaking. But in the context of understanding whether the housing market has bottomed, some of the pressure from the housing market has been taken off because mortgage rates have come down. And we\u2019re not going to get super far into this, but just so you know, some of the reasons mortgage rates have gone down is basically because the pace of inflation has declined a bit, and people basically don\u2019t think that the Fed is going to keep raising interest rates that much. And there\u2019s also a lot of recessionary fears, and when recessions come, mortgage rates go down.
And so there\u2019s a complex factor of things going on, but what you need to know for this conversation is that they are now sitting in about the mid-six percents, still super high, double where they were last year, but lower than where they were in November. And that has helped take some, not all and not even close to all, but some of the pressure off of the housing market in terms of affordability. Now, we\u2019re going to talk about this a little bit later, because of course this whole context of this conversation is about whether the housing market is bottomed. There is absolutely, and I just want to be clear about this, there is absolutely no assurance that mortgage rates won\u2019t just go back up in the near future. I\u2019m going to talk about some different scenarios in a little bit.
But I just want to say now, TLDR, skip forward to the end, there is a very reasonable chance that mortgage rates go back up. So the is something to factor in when you\u2019re thinking about if the market has bottomed. But just know that right now, houses are more affordable in January and February of 2023 than they were in October, November, and December of 2022. So that is something that suggests, and probably one of the main reasons all these companies are thinking perhaps the housing market has bottomed.
Now, just to supply some more evidence about how impactful just this modest decrease in mortgage rates is, there is something called the Mortgage Banker\u2019s Association Mortgage Purchase Index. That\u2019s a mouthful, let me just say that again. Basically there\u2019s an organization called the Mortgage Banker\u2019s Association. They send out a survey every single week to figure out how many people are applying for mortgages, both refinance and new purchases. What I\u2019m talking about here is new purchases, and there\u2019s basically an index. And so it doesn\u2019t give you the exact numbers, it\u2019s all relative to each other, but the index has been sitting between 185 and 205 over the last few weeks.
That probably makes no sense to you unless I give you some references, so let me give you those references. It was at at 160 at the end of October. That\u2019s the relative number of people who are applying for mortgages in October was 160, now it\u2019s 185 to 205. So that\u2019s like a 10 or 15% increase in the number of people who are looking for mortgages. And if you\u2019re wondering what this all means, it means that if more people are looking for mortgages, that means more demand in the market, which could have upward pressure on prices. Again, one reason why the housing market could have bottomed out. Now on the other side of course, a year ago it was sitting around 300, and we\u2019re at 185 to 200, so that\u2019s significantly down from where we were a year ago.
But nonetheless, demand has picked up in 2023. We\u2019ve seen increases in the Mortgage Purchase Application Index five out of the six weeks in 2023, and no one\u2019s saying\u2026 I don\u2019t want you to think I\u2019m saying there\u2019s a lot of demand compared to last year, but what we\u2019re talking about here is not, is the market as robust as it was last year. We\u2019re talking about whether it has bottomed out, and the fact that it has grown five out of six weeks in 2023 is significant. So that\u2019s just something that you should know, is that we have seen mortgage rates come down, that has actually gotten people back into the real estate market, more demand is entering the market right now, and that is probably one of the main reasons why some companies are forecasting that the market has bottomed and is likely to grow over the next couple of years. Again, I am not saying that personally, but that is one of the reasons, one of the sound fundamental reasons why people might be saying this.
And I just want to be clear that what I\u2019ve been talking about is that demand, talking about demand, and some of these companies like Forbes and Fortune specifically said that they think demand has bottomed, but that prices might not have necessarily bottomed. And we\u2019ll talk about that in a little bit, but that could be true, that more people could be getting back into the market, but if inventory goes up, prices could still go down. We\u2019ll talk about that in just a minute.
So let\u2019s actually just talk about inventory and the supply side, because that\u2019s sort of the counterforce here. We\u2019re seeing that demand has gone up, nowhere close to where it was last year, but has gone up a bit since October. And to know if the housing market is bottomed, we need to know if supply is rising in a corresponding way, or if that\u2019s still down, or what\u2019s going on. So I\u2019m going to go through a couple of supply side metrics here, and you can decide for yourself.
So the first one is active listings. This is basically just how many listings are on the market at any given time. And according to Redfin, active listings are up 20% year over year. That is a pretty significant increase in the number of active listings. They\u2019re still below 2021 levels, and they are far below 2020 level. So just for context, that means that we\u2019re nowhere near active listings during pre-pandemic times, or even the first few years of the pandemic. But they are up from their lows in 2022, which is really significant. We just talked about that demand is about half of what it was a year ago, and even though it\u2019s going up a little bit, it is still really far down. And then we\u2019re also talking about how supply has gone up. And this is basically the argument counter to what these companies are saying. The argument that housing prices are going to continue to go up is that even though demand might be ticking up a little bit, that inventory is just too much. And when there\u2019s too much supply relative to demand, that means prices are going to go down. So that is one thing that you should take note of, is that active listings are up year over year, but still far below where they were pre-pandemic.
Now there are two other measurements of supply I want to share, and those are days on market and months of supply. These are both other ways of measuring inventory. If you want to figure out how to calculate months of supply yourself, it\u2019s basically inventory, the number of houses that are on the market in any given month, divided by the total number of home sales. That\u2019s what months of supply means. In other words, it\u2019s basically like how many months would it take to sell all of the houses on the market right now? And just for context, we have seen months of supply go up pretty consistently over the last couple of months, and we are nearing, at least this is according to Redfin, three months of supply. Now, for some context, this is up a lot from where we were in 2021 and 2022 when we were at about a month or month and a half of supply. On the other hand, we\u2019re still below where we were in 2019 where it was above 3% months of supply.
And the reason I like months of supply and I think it\u2019s such a key metric to watch is it measures the balance between supply and demand, right? So it doesn\u2019t just say, this is how many properties are on the market, or this is how many people are looking for properties. It shows how quickly those properties are actually finding buyers. And it is still below the 2020 levels, the 2019 levels, but if you look at the graph, I\u2019ll just describe it to you. It is almost directly shooting up. It is going up very, very rapidly. And to me, this is a very important metric to watch, because even though, again, even though demand may have bottomed, we don\u2019t know, but there\u2019s some evidence that it might be improving.
If this trend of supply and inventory is going up, I think there\u2019s still a lot of downward pressure on pricing. Right? Months of supply have gone up from about 1.5 to almost three. It\u2019s almost doubled in about six months, and there\u2019s no sign yet that that has slowed down. If you look at days on market, which is a very similar metric to months of supply, they both measure how quickly things are coming off the market, you see basically the exact same thing. It has shot up rapidly over the last six months, still below pre-pandemic levels, but we\u2019re seeing very significant increases to inventory.
So when you take all this information together, basically what you have is evidence that demand may have peaked, may have hit bottom in November or December. We don\u2019t know. But there is some signs that we\u2019ve hit the bottom at least for now. But on the other hand, when you look at inventory which is an equally if not more important metric right now, it is still going up at a rate that suggests to me that the housing market has not yet bottomed.
So I personally believe that it is way too soon to call a housing market bottom. I said this at the beginning, I kind of wanted to go into the data before I shared my opinion, but I think it\u2019s kind of crazy honestly to start saying that the housing market has bottomed with all the economic certainty that still remains out there, right? We still don\u2019t know how many more interest rate hikes the Fed is going to do, we don\u2019t know what the \u201cterminal rate\u201d is. Terminal rate basically just means the federal funds rate that the Fed holds interest rates at for a while. We don\u2019t know what that\u2019s going to be. We don\u2019t know if we\u2019re going to go into a recession. We don\u2019t know how quickly the economy is going to grow or shrink. There\u2019s just so many questions that to call the bottom of the housing market right now seems extremely premature in my opinion.
Now, I get what they\u2019re saying, and that\u2019s why I sort of dug into this is like, I get that if mortgage rates have in fact peaked, and that\u2019s a big if, but if they have in fact peaked, there is a case that people will jump back into the housing market in 2023, maybe inventory will level out, and the housing market is bottomed and we\u2019ll grow. That is possible, but personally I don\u2019t think it\u2019s the most likely scenario. And I get in trouble for not explaining this enough when I\u2019m forecasting, but when you\u2019re forecasting stuff, you really need to think in probabilities. There is a case that the housing market has bottomed. I\u2019m just going to say that maybe that\u2019s a 20% chance, maybe that\u2019s a 25% chance.
I think the far more likely scenario is that for the remainder of 2023, we see downward pressure on housing prices, and maybe that\u2019s a 50% chance, and maybe there\u2019s a 25% chance that we enter a full-blown crash where it\u2019s 15% declines year over year in housing prices or more. So those are all possibilities. But I will just say that I don\u2019t think that the housing market bottoming is very likely at this point. To me, there are really different scenarios that we have to think through, and you for yourself can decide whether you think which one is the most reasonable. So I\u2019ll just lay out three or four scenarios, and you can decide for yourself. Because basically, I think the real big variables, the two things that we need to understand, is one, what\u2019s going to happen with inflation and what\u2019s going to happen with a recession.
So scenario one which could happen is that there is lower inflation. We\u2019ve seen inflation fall five, six, seven months in a row. And so if inflation stays on that trajectory and there is also no recession, those things are independent. They don\u2019t necessarily have to go together. But scenario one is there is lower inflation and no recession, which is probably the best case scenario for the economy as a whole, for the country as a whole, because people\u2019s spending power gets preserved, and there\u2019s no recession so less people lose their jobs, there\u2019s more economic opportunity. That\u2019s probably the best case scenario for the economy as a whole. But in that environment, rates could actually go up. Mortgage rates could go up, because if the inflation is lower but there\u2019s no recession, the Fed could keep raising rates. Because if the economy is growing, they have more leeway, they have more cushion basically to keep raising rates without breaking something.
So without a recessionary environment, you could see bond yields rise. That could take mortgage rates up higher, and perhaps go above 7% again. I personally have a hard time imagining them, get above seven and a half percent, let alone 8%, but I\u2019ve been wrong about interest rates, mortgage rates quite a few times in 2022. So take that all with a grain of salt, but because I\u2019ve been wrong I\u2019ve really been studying this a lot, and I think this is probably the case that the worst case scenario for mortgage rates in 2023 is that they go up seven and a half, maybe 8%, but that is accompanied by relatively good economic situation where there is lower inflation and no recession. So in this scenario, I don\u2019t think the housing market will have bottomed right? Because if mortgage rates go back up, that\u2019s again going to damage affordability, which pulls demand out of the market. And so scenario one, which is lower inflation no recession, although good for the economy as a whole, I do think could keep downward pressure on housing prices for the foreseeable future until mortgage rates come back down. So that\u2019s scenario one.
Scenario two is lower inflation but with a recession. So again, we\u2019ve seen inflation come down, it\u2019s on a trend where it is declining. And again, I want to make clear to people when I say inflation is lower, that doesn\u2019t mean prices are declining. It means that they are going up less fast, but that\u2019s what the Fed cares about. Other people might want prices to go down, but what I\u2019m talking about here is trying to predict Fed behavior, because mortgage rates are so important for the housing market. And what I\u2019m saying is that what they want to get to is a rate of 2-3% inflation. And so if inflation gets lower and there is a recession, which to me is a relatively likely scenario, this is the best chance for mortgage rates. So unlike scenario one, this isn\u2019t a great situation for the economy as a whole, because we go into a recession.
But this puts downward pressure on mortgage rates for two reasons. One, because there\u2019s lower inflation, this will slow down the Fed\u2019s rate of hikes. And also, recessions put downward pressure on mortgage rates. I know this is kind of hard to understand, but basically mortgage rates are based on bond yields. And when there is a recession, people want bonds. And when they want bonds, that pushes down the yield on bonds, and that takes down mortgage rates. I\u2019ve done a couple of episodes on this, I\u2019m not going to get too into it right now. But what you need to know is generally speaking, when there is a recession, mortgage rates go down. And so if we see the combination of lower inflation and a recession, this is likely to get mortgage rates down into the mid-fives by the end of the year, so it could go down even further.
So this scenario, I think this is the scenario that people who are saying that the housing market has bottomed are envisioning. They see inflation going down. They also see a recession coming, and that means that they think mortgage rates are going to go down even further, and that\u2019s going to add more fuel to the fire for the housing market, and prices are going to have bottomed and go back up. Now, I think that is a very reasonable situation. I\u2019m not saying it\u2019s the most likely situation, but lower inflation with a recession, those are two things that a lot of people think are going to happen. And so I do think there are fundamentally sound, very reasonable ideas that the housing market could have bottomed. I personally just think it\u2019s way too early to make that call. I\u2019m not ready to say that there\u2019s going to be a recession, or that there\u2019s going to be lower inflation well into this year. But people who are forecasting that out, there are fundamentally sound reasons why they are saying that.
Okay, so that\u2019s scenario one and two. Scenario three is higher inflation with a recession. So remember, scenario one was low inflation, no recession. Scenario two, low inflation, yes recession. Scenario three, we have higher inflation with a recession. Now, this will probably keep mortgage rates in my opinion close to where they are right now, because higher inflation means that the fed will raise interest rates higher. That puts upward pressure on mortgage rates. But a recession, as we just talked about, puts downward pressure on mortgage rates. And so these might in my mind cancel each other out depending on the severity of the recession, depending on the severity of the higher inflation. You could see mortgage rates stay sort of close to where they are.
Now, scenario three could happen, but the trajectory of inflation does not make it look like this is one of the more likely scenarios right now. We\u2019ve seen inflation drop several times, seven months in a row or something. And so I think personally it could go back up, inflation, but it would take another geopolitical shock. Like a year ago inflation was starting to look like it could go down, and then Russia invaded Ukraine. That sent inflation up way, way higher on top of all the other causes of inflation. That was just sort of one more catalyst. We\u2019re now seeing the supply side shock, a lot of the money printing has slowed down, and so we\u2019re starting to see inflation get under control. But there\u2019s a lot of geopolitical turmoil right now, and we\u2019re seeing balloons, they\u2019re shooting down stuff left and right. Who knows what\u2019s going to happen, and if that continues that could put other inflationary pressure and lead to scenario three, which again, is higher inflation with a recession, probably keep mortgage rates close to where they are now.
So I think those are the most likely scenarios. The three things that could happen. I don\u2019t know which one\u2019s going to happen. I personally think one or two are the more likely ones, because inflation has shown signs of coming down. I just don\u2019t know if there\u2019s going to be a recession or not, but I just want to be clear that if there is a recession, there is a good chance that the housing market will rebound relatively soon, because mortgage rates will probably go down. And I know some people think, oh, when there\u2019s a recession people don\u2019t want to get into the housing market. I personally believe that the housing market is really about affordability right now, and that if mortgage rates make it more affordable for people to buy, even in a recessionary environment, we will see demand go back up.
So that\u2019s just, those are three scenarios. You can decide for yourself what you think. There are probably other scenarios, those are just the three that I think are the most likely. There\u2019s obviously a fourth scenario here which is higher inflation without a recession, but that to me just seems very unlikely. If inflation starts going back up, we\u2019re almost certainly going to go into a recession. I could be wrong about that, but I think that is much less likely. So to me, I still think that it is possible that the housing market is bottomed, but unlikely. I think personally, I\u2019ve been saying this for a while, but I think the first half of 2023 is going to be more of the same. We\u2019re going to see a lot of mortgage rate volatility. We\u2019ve already seen it come up a little bit off of where it was in January, and I think with that volatility, people are not going to jump back into the housing market as enthusiastically as they may in the second half of 2023, depending on what happens with inflation and recessions.
So I still think the most likely scenario is that housing prices fall in 2023 but don\u2019t crash, but that\u2019s just my opinion. As things develop, we\u2019re seeing new data come out every single day. And as things develop, I am going to continue to share with you what is going on so you can make decisions for yourself, and I\u2019ll share my opinion. Hopefully I\u2019m right, a lot of times I\u2019m wrong. But my goal with these types of episodes and sharing this information is to help you understand the different scenarios that could happen. You may think scenario one is the most likely, or scenario three is the most likely, or whatever it is. My hope is that you can help understand some of the macroeconomic, some of the behavioral elements of what\u2019s going on in the housing market and the economy right now, so you can make your own informed decisions.
With that, I am going to get out of here. Thank you so much for listening. If you have any feedback or questions about the show, you can always hit me up on Instagram where I\u2019m @TheDataDeli. We will see you next time for the latest episode of On the Market.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n