It is important to do your homework before buying or selling in today’s market. This in-depth article will answer questions like, will the market crash, where are things headed for the rest of the year and beyond, and what does affordability look like right now?

Are we Headed for a Housing Bubble-Bust?

Many of us have PTSD caused by the explosive market crash of 2008, and the scars of that financial disaster are still visible today. However, what is going on in the market today is entirely different than the housing boom and bust of 15 years ago. 

In 2008 homes lost value for two main reasons —- loose lending standards and cash-out refinance. 

In 2008, the only actual requirement for loan approval was a heartbeat. During this time, a housing surplus induced mortgage lenders to lend to anyone who could breathe in order to fill the overabundance of inventory. Back then, borrowers were not required to have a job or an income; no verification was needed, also known as a stated and no-income loan. Today’s lending is much stricter and it is becoming increasingly difficult to get approved. 

The second reason for the real estate crash was cash-out refinances. Homeowners took the equity they had, cashed it out, and attempted to live life as a perpetual vacation. 

IMG_0203 (1)Source: Urban Institute 

When people with no job and no income take out a loan and then take the equity and cash out, leaving homes with lost value, a market crash is inevitable. Today’s borrowers are highly qualified and have many options for financial help to stay current on their mortgages in the event they run into temporary financial distress. The 2008 and 2022 markets are not the same —- and we are not headed for a burst of any bubble.

What Does the Future Look Like?

Of course, none of us have psychic abilities, making it impossible to predict the future with 100% certainty. However, experts can give us a clear, logical forecast using data and historical patterns.

The Fed started May off by raising the Federal Funds Rate (FFR). We have heard whispers of a recession. Home prices are increasing, and interest rates are on the rise. So, what does that mean for the market a few months or years down the road?

Although home prices will come down at some point, it isn’t likely to happen this year. In December of 2021, home price forecasts from leading housing authorities ranged from -2.8% to 16% annual price growth. 

The most recently updated home price forecast looks similar. At the high end, Zillow predicts 14.9% over the next 12 months. Fannie Mae believes home prices will climb 11.2%. The National Association of Realtors (NAR) indicates a more modest increase of 5.7%, and Realtor.com comes in with the lowest prediction of a 2.9% increase. 

IMG_0209.   Source: fortune.com

Homebuyers who wait until later in the year could wind up paying over $20,000 for a home using a quarter one median home sales price of $428,000 —- without considering rising mortgage rates.

Savvy home buyers who purchase soon will benefit from almost immediate home equity. Buying a home at $428,700 will likely be worth over $20,000 this year; all the while not experiencing an increase in their monthly housing payment. 

There is no reason to believe homes will lose value throughout 2022, and most experts say we will see home appreciation continue safely through 2026. We began 2022 at about 5% appreciation, and each month we have seen that number rise. 

Where is Affordability Right Now? 

With mortgage rates, home prices, and inflation rising, where is affordability right now, and what does that look like?

Recently, Bloomberg reported that data from the Harris Poll “show 84% of Americans plan to cut back spending as a result of price spikes. More than 70% of respondents said they’re feeling the effects of inflation, the most in gas prices and groceries.” 

Americans are all feeling the pain of inflation. It affects us every day and determines what we can spend daily. Affordability is a genuine concern for those considering purchasing a home right now. 

In January 2021, mortgage rates were at historic lows. A typical mortgage rate was around $1200. Considering our current market, with rising interest rates and things look pretty different. Let’s put mortgage rates at 5.5% because, in reality, the average rate will be there very soon. That same mortgage jumps from $1,200 a month to $1,700 a month — that is a huge difference. A mortgage that is $500 more a month, plus higher gas prices, groceries, and even credit card interest, can create real pressure. 

IMG_0206 Source: NAR

Now, let’s look at the bigger picture. Right now, we are seeing affordability approach historical levels. Based on the most recent income and price data, the Housing Affordability Index calculates if a typical family earns enough income to qualify for a mortgage loan. The higher the bar, the more affordable homes are. Today we are at 135.4%. Homes are not as affordable as they have been in the past decade; especially not during the housing crisis when distressed properties controlled the market and houses were sold at massive discounts. As prices and mortgage rates rise, homes are not as affordable as in recent years.

Affordability is a combination of prices, mortgage rates, and wages. All three of these have been climbing over the past few years. Mortgage rates offset much of the rising costs, so we are feeling the affordability challenges. 

Looking back to the 1990s, homes were more affordable, leading to the housing crisis. So, you must look at these numbers in context and ask yourself, what are you using to compare if homes aren’t affordable anymore? 

Recently, the NAR was quoted, “The increased cost of spending on other items impacts the ability of the average consumer to have enough leftover income to purchase a home. Excluding the cost of shelter, the average consumer is spending an additional $429 monthly for items other than shelter. Meanwhile, average weekly wages rose just $212 per month, so the consumer is short by $217 per month. If we take the present value by applying a mortgage rate of 4.72% over 30 years, this means that the average consumer will be looking for a home that is $41,793 cheaper.”

Understanding Today’s Real Estate Market

It is essential to work with a knowledgeable real estate agent who knows the area, understands trends, and is up to date with the latest figures. Knowledge is the most powerful tool in the real estate market. If you are ready to buy or sell in Northern Virginia or the D.C. area, contact us and find out how we can help you.

Khalil El-Ghoul

"Thanks for reading! I’m passionate about empowering home buyers and sellers with professional advice and unbiased information, throughout the real estate transaction. Unlike most agents, I always put clients first. When it comes to negotiating, marketing homes, and sealing the deal, I’ve got the experience and knowledge you’re looking for. If you have any questions about moving to VA, D.C., or MD, don’t hesitate to reach out."