On today’s episode of the 5 Things podcast:
What once seemed like it was as hot as lava, the U.S. housing market now seems to be cooling down pretty quickly. But why? There seems to be enough people looking to buy homes right now with Millennials making up 43% of homebuyers, up 5% from last year. They are looking for more space and a place to set down some roots. So what seems to be the problem?
According to experts, there isn’t enough supply to meet the demand. Recession fears and rising inflation are also playing a part with higher interest rates making mortgages more expensive.
5 Things Sunday host James Brown sat down with veteran observers of the housing market and USA TODAY journalists Swapna Venugopal and Terry Collins to talk about the housing market and if what we are seeing is a buyer’s, seller’s or a weird neverland of in between. And are we heading into more normal territory.
For more on the housing market, read:
For more stories from Terry Collins, click here.
For more stories from Swapna Venugopal, click here.
If you have a comment about the show or a question or topic you’d like us to discuss, send James Brown an email at email@example.com or firstname.lastname@example.org. You can also leave him a voicemail at 585-484-0339. We might have you on the show.
Hit play on the player above to hear the podcast and follow along with the transcript below. This transcript was automatically generated, and then edited for clarity in its current form. There may be some differences between the audio and the text.
James Brown: Hello, and welcome to Five Things. I’m James Brown. Go Bills. Every week, we take a question, an idea, or a concept and go deep. If there’s something you’d like us to look into, or just want to say hello, email me at email@example.com or at firstname.lastname@example.org. You could also find me anywhere on social media @JamesBrownTV. We also have a voicemail line, that’s 585-484-0339. I always love hearing your thoughts on the show. I live on a top floor apartment on a busy street in Rochester, New York. As I renewed my lease a few months back, I made a promise to myself that this lease will be my last, one way or another. I’m not alone. Many of us millennials have put off home buying and are playing catch-up. But, that’s over now. In fact, if your house is on the market, odds are, a millennial is trying to buy it. The National Association of Realtors says, “Millennials make up about 43% of home buyers.” That’s up 5% from last year.
There’s oh so many reasons why we’re rushing into the market, like wanting more space after being isolated after the COVID-19 pandemic, and being 30-something, or having or wanting to have a family and some roots. But frankly, our timing couldn’t be worse. The last few years has been a seller’s market. As we’ve covered on Five Things and at USA Today, we literally don’t have enough houses to meet the demand. And as baby boomers cash out their houses, sliding into retirement, bidding wars became common for their houses in recent years.
That means they cost a lot more than they did five or 10 years ago. All this as the country, and really the world, deals with record levels of inflation and fears of a recession. To fight inflation, the Federal Reserve, who manages the nation’s money supply, raised interest rates. As expected, banks followed their lead, which made buying houses even more pricier. For example, a year ago in October, 2021, the average mortgage rate in America was about 3%. That’s according to the Federal Reserve.
As I record this now, in October, 2022, those rates have more than doubled. They’re almost 7%. Anyone who’s ever had a credit card or taken out a loan knows that that change is massive. All of this has shifted how home buyers are thinking, and how sellers are thinking, and what the heck is happening with the housing market overall. I’ll get two takes on that in a round table conversation with my colleagues, Swapna Venugopal and Terry Collins, both with extensive experience covering housing for USA Today. Swapna, Terry, welcome to Five Things.
Terry Collins: Thanks for having us.
Swapna Venugopal: Thank you. Good to be here.
James Brown: Swapna, am I being too grim? Is the picture I’m painting accurate?
Swapna Venugopal: Yeah, you are. Truth is, yes, mortgage rates have gone up. And with that, you have fewer number of buyers being able to buy the homes that they really want to. The sellers are also reluctant to put their homes up on the market because they know they won’t get enough buyers and, more importantly, they’ve locked in very low mortgage rates last year or year before, so they are in no hurry to put their homes for sale. So for the buyer, it’s a double whammy. On the one hand, you have mortgage rates that are really high. On the other, there’s not even all that much to choose from because, compared to last year, I think listings are down by 20%, or so.
James Brown: Terry, what’s your take? Am I being too grim?
Terry Collins: I see your unique situation. I think what we’re in right now, we’re in a housing correction now, finally, as the Fed said, but we’re also in a place where, just heard this [inaudible 00:04:10], I said it at the same time, and I talked to source just moments before we got on this, a recalibration period of the market. And I think there’s some adjustment that we probably all need to take and we probably will have to, whether we like it or not. What happened during the time going into the pandemic is that we started, as you said, in swapping the notes, we started to value shelter. Shelter became a top priority with the pandemic. So we started to look inward and spending more time in our homes. Our homes became in a way even more valuable because we started looking at things and started reassessing saying, man, if I’m going to be here, I need more space.
Maybe we need a bigger house. So we started to think about, oh, well what can I do about that? And we started to look and we saw a market that for, according to some experts, but for the better part of a decade, it’s been under built. There are not enough homes to meet demand, not enough supply to meet the demand when you add on the largest group now, millennials, wanting to enter the market, what you have is just this complex of, well, a very competitive market to where sellers were selling their homes, who were gaming up to sell their homes. Some for as is because they were buyers who were waving contingencies, but because they were already paying overprice now it became such a game and competitive game, I want the house. What’s it going to take for me to get into that house?
So there’s a lot of other factors in this right now that has made things complex. Interest rates are up, and there’s a shock value to that because we went from about 3% at the beginning of this year to now a matter of months. Now we’re in some cases hovering over 7%. That’s a lot to take in, a lot to digest for many who wanted to get housing at that great historical rate. Now we’re seeing it back to what some say is almost near the norm of seven, eight, maybe even 9%. So we’re having now to make a lot of adjustments to what we thought was almost going to be, in a sense, part of that new norm that we’re under now living with the pandemic.
James Brown: Swapna, I saw you nodding a bit. What part of what he said connected with you?
Swapna Venugopal: One thing that stood out is how the contingency requirements are being dropped. This year it’s been, people are just not willing to do that, right? So anything that’s on the list, that’s something they need to have fixed because with the mortgage rates being high, they don’t have a lot of disposable income. The buyers don’t have a whole lot of disposable income on their hands if they’re paying high monthly payments, so they need the sellers to take care of most of the requirements, most of the repairs. So that’s become a big issue. I think it was in September when about 30% or so of homes fell through, the contracts of so many homes fell through. So to me, that’s what stood out.
Terry Collins: Yeah, yeah, no, exactly Swapna. And that’s almost part of that normalcy when you would go to look at a house, have signed contracts and things like that, you’re like the [purpose 00:07:31] of getting the house, but you’ve got to go through those inspections to make sure you’re getting what you’re paying for. An if there’s something that’s a bit off here and there, you have that option within to back away. It’s no longer that free for all thing. Like, hey, oh, I can’t get the house? Well, how much more do you need? Oh, the inspection? Don’t worry about it. I want the house. We’ll figure it out. That’s all gone now, with the way our economy is right now. We’re really appreciating, rather I should say, the value of our dollar, and we’re seeing that being reflected in housing. You get a good reflection of where the economy is headed through housing in real estate because it’s such a high priority to us.
Swapna Venugopal: This is also the question of, is this a good time to buy despite all of these factors? With the high mortgage rates and lower number of homes listed. I was just thinking about that and from a few economists, what I’ve heard is it still might be a good time to buy because the rates are expected to keep going up until end of next year because inflation’s still not under control. And so there’s a possibility if you bought a home now and let’s say a year and a half later, the rates come down, you can always refinance. So for people, this might be a good way of locking in their monthly payments as opposed to paying rent where rent keeps going up month after month, I mean year after year and that’s been the trend as well. So that’s something that buyers have to consider.
Terry Collins: Yeah, because in some markets you’re paying the amount of rent that you would for a mortgage in other parts of the country. So soft note, and I live on opposite coast where rents are high, and so people are really taking that into consideration, like, do I stay or should I wait? And it’s like there’s not a foolproof answer. It’s really coming down on a very micro level to decision making on what is within their budget. Is it something that they can afford? Is it something worth taking the risk on in buying a house at this stage?
Because it is miraculous from where we were just a few months ago in January, thinking that this was going to last. If you talked to some folks who, well, I know Swapna probably talked to a year ago at this time, October, November, December, thinking that yeah, this could ride through all of 22 into 23 and maybe more. This might be the new norm. Well, there were some other factors at play that brought us to this very dramatic place that we’re in now. It’s not a crash, but it’s a very, very, very dramatic decline of demand in terms of housing and to compound with the supply.
James Brown: As I listen to you both describe the circumstances that we’re all in, there’s a word that Terry said that keeps coming back to my head, recalibration, and what I gather from you guys now in everything I read prior to this interview is that perhaps we’re headed back to normal. That what we experience in terms of the bidding wars, in terms of the housing market being as hot as lava, that was the abnormal time. Could it be that we’re actually transitioning back to a more normal circumstances when it comes to home buying?
Terry Collins: Yeah. Yeah. It’s almost comparable to gas. A couple years ago we were paying, in some instances, gas was down maybe $2, maybe below. And that was a byproduct of the situation we were in with the pandemic. And now with the rate that we’re, you see what’s happening with oil, oil is inching up in creeping up. So now therefore in some instances, I’m living in California, some places are paying almost $7 for a gallon of gas. So think about if you’re going from two, $3 a couple years ago to now you’re paying $7, where does your discretionary income go?
What sacrifices do you have to make in addition, just for the essentials like gas, petrol, we need it, need gas to get around. It’s the same thing with housing. Rates are going to go up. For those who may have thought that they were in a good place to buy a house now they may not be able to afford one. It’s a challenging decision that you have to make to get in now before you think it might be too late or you might get priced out.
James Brown: Swapna, your take?
Swapna Venugopal: Buyers are grappling with a whole bunch of issues. Of course you have the high mortgage rates creeping up month after month and then at the same time, so even now with the high mortgage rates, you have home prices going up by 8% year over year. So that’s still happening. Normally when the mortgage rates double, you see a proportional decline in home prices. That’s not really happening fast enough. In the last one or two months there has been month over month declines, a very small decline, but at the same time, if you look year over year prices are still very high.
So it’s sort of a calculation that people have to make. How long do I wait? Will the home prices actually stabilize? Will they reach a point in the near future where it’s not really going up year over year? And if that’s the case, once they buy, what happens when home values decline? Suddenly they have no equity in a year or so where people who bought two years ago would’ve built up so much equity. So that’s another thing they have to struggle with. Will they be wiped out by buying at the peak while the mortgage rates are so high? So it’s too many decisions to make and none of them easy, really.
Terry Collins: Yeah, yeah. And what if you’re a seller and just say you have a crisis or maybe you lost your job and you’re forced to sell your house and you have to sell it, you might have to do a short sale. You’re not going to get the value of what you thought the home was worth, but you need the money to survive or to just make ends.
Swapna Venugopal: Right. But interestingly enough though, most people who bought the home before this year or even beginning of this year would be in a much better position than people who will be buying now, because these are people who’ve actually built up home equity. So God forbid someone loses their job and they’re a homeowner, they still have something to fall back on. I think most people have built up equity, it’s about 20% on average that it’s gone up. So I think there is something to be said for that.
Terry Collins: Yeah. [Some questioning 00:14:37]. And then also it’s not really as widespread. There’s still some pockets and some regions in the country where housing is strong. So those areas that where housing is strong, it’s still somewhat competitive. You look at some places down in the south, some places a little bit northeast where those markets are still strong now, but then if you go out to parts West, the market is changing. It’s a matter of geographically where you are and what you’re looking for.
James Brown: What is it about those markets that’s allowed them to brave the storm? At least the beginning of the storm it appears.
Swapna Venugopal: I think the towns metro areas where you’re seeing this uncertainty and prices coming down are really places that went up by a lot over the pandemic, the so-called Zoom towns. Those places are seeing a correction as maybe people are returning back to where they came from. More people are being called back into the office, so they can’t really afford to live really far away. So some of those places are seeing a correction, for instance in Boise and in Phoenix, certainly there’s a correction.
By correction, I do not mean prices have come down, but the listing prices are dropping, right? So they are not able to claim the same 20% a year over year increase, so a lot of them have to adjust their asking prices. That’s happened in many of these Zoom towns. Places where prices actually have dropped, a few of them happen to be in California and it’s largely because they were very high to begin with. So they’re not able to sustain that kind of increase in prices anymore. That’s probably part of the reason.
James Brown: As I absorb everything you’re saying, I’m trying to put it into the formulaic, is this a buyer’s market or a seller’s market or are we in some weird never land in between?
Swapna Venugopal: Yeah, it most certainly was a seller’s market, and up until this point, it seems to be slowly moving towards a buyer’s market, but you can’t fully call it a buyer’s market either yet. So we are in that transition period. Inventory levels are at a three month inventory level, which for a balanced market, it’s supposed to be about four and a half months or so. So we are still a little ways away from a fully balanced market, but it’s certainly better than supposed to be more in favor of buyers at this point.
Terry Collins: Yeah. So Swapna said four, I’ve heard experts say it can be as much as six to eight months, if we want to look at quarters. And that goes back to maybe that root term of recalibration. The market is vast and it can’t be just defined in a couple terms. The only thing I think that’s certain is that there’s a lot of demand, less supply, builders are now going to have to think about what they build to stay active and competitive. Because there’s always going to be a builder who’s going to want to stay in the market and they’ll maybe build houses, but there may not be as much house because they have to make some sort of profit. They have to stay in business. So they’ll adapt, they’ll adjust.
James Brown: What about people like me, first time home buyers? Swapna, I know you’ve written about this a bunch. How do they compare to other generations who have tried to break in?
Swapna Venugopal: For first time home buyers? Yeah, it’s a very difficult market to break into at this point because for first time home buyers to be able to buy into their starter home, you need people who currently live in starter homes to move into homes that are bigger, and that’s going to be difficult this year because most of the current homeowners are tied into a very low mortgage rate. And so they are in no hurry to trade up because it’s difficult. It’s going to be expensive for current homeowners.
So that is a difficult proposition for people looking to break into starter homes. On top of that, of course there’s always been an inventory crunch when it comes to homes that are below $300,000 because in the last seven or eight years, builders simply haven’t been building enough starter homes because it’s not really economical for them given the costs of land and all the zoning issues around them.
So it’s been a tough time for people looking to buy start homes. And this specifically, I’m talking about folks, millennials looking to buy starter homes. I’m not talking about millennials, of course you have also a large number of millennials looking to buy homes in the higher categories. For them, it seems to be the same as everybody else. This is specifically for people trying to break into that category of below $350,000 home.
Terry Collins: I don’t think there’s such a thing as that price because I’m sure Swapna gets information that says what’s the medium price of a home? Some ranges to the high three hundred thousands to low 400 thousands and look at that range and that variation. And middle class people are having a hard time finding a home or looking to find a home. And Swapna said, yeah… I wrote something, hang on. Starter homes aren’t being built as much or as quickly.
I think that’s what I probably, if I’m off face, let me know, but I think that’s what I was getting to that builders are going to have to think again on what they want to build and who were they trying to build for. Are you trying to build for someone like yourself, James, who was looking for that [rehears 00:20:38] home? Correct? And then there are those who may be a young couple who may have two small children. Do you build a multi room house for them or do you cater maybe to you or build a home, maybe you’ll be comfortable with two bedrooms and a couple of bathrooms. The builders, do they add that fourth bedroom? Or do they build to meet whatever the market demand is now?
James Brown: Is that decision based on simply profit?
Swapna Venugopal: Yeah, for builders, most certainly it is. Finally it’s a business for them, right? So when they get a piece of land, they would want to get the maximum profit from that land so they buy where there’s demand and the most they can get out of it. So yes, it does boil down to that.
James Brown: I’ve seen reported in many, many outlets that mortgage demands dropped dramatically over the last couple of months. What does that say to you as veteran observers in this space?
Swapna Venugopal: It is something that is to be expected. So you have a looming recession and then you have mortgage rates that are double of what they were, so even psychologically speaking, it makes you reluctant because you knew in January if you could lock something in, it was maybe 3%. Now all of a sudden it’s closed to 7%, so you do have that psychological barrier for you to really get to that point. And I think that’s the reason why you’re seeing 17% of homes or contracts falling through. That’s a big reason. I think it’s a lot to do with psychology, right? And then of course there is the economic reality, which is a recession is looming, is what most experts say, and you feel uncertain. Is this a good time to take the plunge? What if the home values crash? And so I think it’s a natural result, right? You can have a fair expectation that the mortgage applications would be down under these circumstances.
Terry Collins: Exactly. Because for those who were thinking about maybe hopefully trying to get something within 3%, 4%, were trying to develop and get their income and everything in order, once mortgage rates start getting up toward around 5% and things like that, and you don’t want to spend any more than like 25, 30% of your income on say a mortgage payment, okay, there’s a mortgage payment and then there’s insurance, there’s the taxes, there’s property maintenance. It just becomes, that extra increase in the mortgage rate makes you wipe out probably what you thought that income you would have for those other things that comes with purchasing and owning a house. So it’s one of the reasons why I think mortgage rates are down. The rate itself has put additional financial burden to the want of wanting to have a house.
James Brown: Any famous last words?
Swapna Venugopal: Hang in there.
James Brown: Terry?
Terry Collins: Be resilient. Be resilient. Experts tell me if you’re set on buying a house, you have to thoroughly examine your expenses, down almost to what some would say the penny. I’d set to ask, down to the penny? Yeah, down to the penny.
James Brown: If you liked the show, write us a review on Apple Podcasts or wherever you’re listening in, do me a favor, share with a friend. What do you think of the show and Swapna and Terry’s thoughts on the housing market? Email me at email@example.com or leave me a message at 585-484-0339. We might have you on the show. Thanks to Swapna and Terry for joining me, and to Alexis Gustin and Shannon Ray Green for their production assistance. Taylor Wilson will be back tomorrow morning. And for all of us at USA Today, thanks for listening. I’m James Brown and as always, be well.