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Where is the housing market headed?

Absent a black swan event and the unknown of the current administration's tax policies, the housing market is poised for continued success.

We’re hearing from various brokers throughout the country reports that housing sales are showing a marked slow down that is separate from the seasonal slow down that we always experience in the housing market heading into the fall. A great deal of this has to do with a normal, seasonal slow down but even more may be due to the decrease in housing affordability.

According to a recent NAR report which covers housing affordability, the year-over-year decrease in affordability is somewhere between 10% and 15%. This doesn’t seem like it could be much. It’s measurable and reflection of the fact that house prices are rising faster than household income. In a related report, we’ve read that the increase in median home prices in a dozen or more states is 60% to 110% higher over the last six to seven years when compared to the increase in household incomes. All of these factors point to a certain exhaustion of the surge in home-buying activities.

This doesn’t likely have much impact on high-net-worth families, whether they’re buying new primary homes or second and third homes. It does indicate that for first-time homebuyers — and even some segments of move-up buyers — home prices are beyond their reach or beyond their desire to chase rapid increases in homes for sale. From other sources, we note that 12% to 13% of home purchases are running into problems where the appraisals are not coming in at the price indicated in a purchase contract. This too is having some impact on the softening in home sales.

Overall, none of these factors will have a significant or material impact on home sales. Rising incomes, low interest rates and all other factors, including the balance between families looking for housing and the availability of housing, point towards a continuation of the strong housing market of the last 15 to 18 months.

What could cause more significant declines in future home sales?

More frequently, we’ve had brokers ask about the future of housing sales, mainly due to their experience in facing many housing cycles over the years. When is the next cyclical downturn coming and what might cause that?

First, we conclude that all housing fundamentals, with the exception of the decline in affordability, are positive. Household formations, low mortgage rates, high household formation levels, and growing incomes all favor continued housing sales and home price appreciation. So, the question becomes what could knock this off the strong foundation?

Among the things that we are following is the housing debt crisis now appearing in China where two of the largest residential property developers with hundreds of billions in debt are struggling financially. Various news sources indicate that the likelihood of large-scale defaults could occur absent the intervention of the Chinese government.

There are some indications that the Chinese government, which has been trying to tamper with residential development and sales, may not intervene. The massive buildup of debt may spill over into credit markets throughout the world. Other financial crises have been started by these kind of credit problems in other parts of the world and could affect credit markets in the U.S.

Although we don’t think it will have a significant impact on the housing market, sales or prices, it’s possible that some or all of the tax policies being proposed in Washington could have an effect. These policies include significant increases in both personal tax rates and capital gains rates and could have a negative impact on housing sales and prices. It’s too early to know what the final outcome of the various proposals will be or how they might impact housing sales. Certainly, the unknown and unknowable of these proposed tax increases could cause a pause in housing sales.

Lastly, we caution that the unknown and unknowable of another black swan event like COVID-19 in March 2020 could take place again — at any time. That is the nature of black swan events, you don’t know what they’ll be, and you don’t know when they may happen as they are events that even intelligent leaders can’t foresee.

There are many disruptive factors taking place in the world today. For example, the spike in energy prices throughout the U.S., Europe and Asia may have a significant impact on economic activity. Further, supply chain issues throughout the world economy may have the same impact. Taking together all of these factors may cause a downturn in housing sales activity. The fact is, no one knows for sure at this time.