Why Home Prices Aren't Falling as Fast as Expected

Home prices have experienced the third worst drawdown going back to the late 80s. That doesn’t mean much when the third worst drawdown is only 2.72%.

But a lot of us in the world are left wondering why that number isn’t any higher?

With 7% mortgage rates and lifetime high inflation, home prices should be breaking down a little worse.

Of course there is still a ton of excess cash and savings on household balance sheets, earnings growth hasn’t kept up with inflation but it’s been close, and the normalizations of supply chains has boosted demand because of shorter lead times for buyers wanting homes.

A 7% financing rate should still put a damper on buyer activity though.

This chart has been floating around the last week. When it comes to what people own the majority of owners (99%) have a mortgage less than the 7% market stated rate, and many of those have rates below 4%.

People also tend to stay in their homes for longer. With the average time a person spends in their home being 12.3 years - nearly double the time than in 2005.

That statistic is largely skewed because more from older generations own homes, and have for longer, but among people under 35, 37% of them have been in their home for 4-7 years.

So this could be a very reason why home prices aren’t falling so fast. In 2008 the market was flooded with homes, today we don’t see that. People are able to pay their mortgage happily at 4% as long as they don’t need to move. If that continues home prices shouldn’t fall that much more.

In a statement released from Home Depot, which has a unique lens into the housing market, Home Depot stated that “on housing turnover, there’s just that interesting dynamic of whether — what is actually happening in housing turnover. There just aren’t willing sellers out there to the degree that they have been in past eras. Our homeowners customers are in such a healthier position that you just think about their motive for selling. As you know, over 90% of US homeowners either own their homes outright or have fixed-rate mortgages under 5%. And so that incentive to sell and move to a higher-rate mortgage just isn’t there. And in fact, the incentive is really there to improve in place. So it’s hard to say how the housing economy might impact us.”

From that I gather that home renovators may actually have a unique opportunity in housing going forward until rates and the housing market normalizes.