The Good, the Great, and the Unknown: State of the Housing Market

September 23, 2022

Economic tailwinds are driving a strong residential real estate market. But COVID-19 is still a threat.

The Real Estate Market will catapult us out of this recession.

The Real Estate Market is heading for a crisis much like the health crisis that’s causing it.

Depending on the signals you’re watching, the view is a bit different. When economic indicators are confusing, it’s helpful to separate what we know for sure from what we think will happen.

The Good

The best incentive today to buy or refinance a home is the average mortgage interest rate. Mortgage rates recently hit an all-time low for the eighth time this year. The 30-year fixed-rate is averaging around 2.88%, the lowest in history, dating back to 1971.

This incentive is stimulating current purchase and refi activity. Nearly $1.1T in first-lien mortgages were originated in Q2 2020. Black Knight Mortgage Monitor reported this to be the largest quarterly origination volume on record.

First Lien Origination

Is this trend likely to continue?

The Federal Reserve announced it is committed to supporting the U.S economy during these challenging times, and its economic projections assume rates will remain near zero until at least 2023 to help reinvigorate the coronavirus impacted economy.

At some point, refinance activity will level off. Eventually the majority of people who can will take advantage of the lower rates. But for now, the mortgage market in Q3 is positioned to outperform Q2 numbers, at least according to rate lock data.

Rate lock data is a leading indicator in projecting mortgage activity because it takes approximately 45 days to lock in the rate and complete the transaction. Purchase locks scheduled to close in Q3 were 23% above the seasonal expectation, more than making up for Q2’s COVID-19-related shortfall, according to Black Knight.

Purchase rate locks

The Great

If lower rates are good news for those property owners who can refinance, they’re even better news for buyers. New homebuyers all of a sudden have a huge advantage.

Looking at the 30-year interest rate chart above, today you can get a lower rate than any first or move-up homebuyer in the past two generations. First American estimates that house-buying power (how much home one can afford to buy given household income and the prevailing mortgage rate), increased 15% since July 2019.

As a result, amid the pandemic, the homeownership rate in the second-quarter soared to a 12 year high. This is highest level since the financial crisis.

At the beginning of the decade, the market was battling to regain its footing in the wake of one of the largest housing downturns in U.S. history. The homeownership rate decreased to 65.1% in 2019 from 66.5% in 2010. With the series of recent interest rate drops, the homeownership rate rebounded to 67.9%, mostly driven by younger households.

homeownership rate

There are other tailwinds. Equity continues to rise for older generations, allowing them options like refinancing to lower their payments or helping their kids with a downpayment toward their own home. According to a homebuyer survey by LendingTree, nearly 50% of millennials purchasing a home utilize help from a parent.

Another inadvertent tailwind of the pandemic is personal savings accumulating. With fewer people spending while sheltering at home, their savings are going up. This excess cash can go toward a downpayment on a home.

The bottom line is homeownership jumped 260 basis points in one quarter. With 69.2% being an all-time high in 2004, a new record is only 130 basis points away.

personal savings rate

The Unknown

As the virus spread to U.S., the primary goal for the government became to keep people in their homes in order to contain the disease. Foreclosure and eviction moratoriums were put in place to avoid magnifying the health hazard, as well as protecting people from financial ruin.

Six months later, some of the economy is resuming its normal activity. But some businesses closed permanently and the virus is still not under control. The longer it continues, the bigger of an issue it becomes.

Wall Street appears to see enough support in terms of economic growth and policy to hold their ground. The fundamentals have rebounded off their lows and the trend is positive, but the data is well below pre-recession levels, so the magnitude of the recovery is still uncertain.

Government provided a lot of stimulus to support consumers, who are responsible for 70% of the U.S. economy. This might be the reason the economy is still chugging along. But the stimulus money has been spent and the second round of checks is becoming overdue while Republicans and Democrats continue to iron out the details on how to make it happen.

Another potential concern is affordability. Housing supply constraints, which are driving the hot housing market, have a bad side. They are associated with faster price appreciation, which may once again impact people’s ability to afford a home.

What happens to the housing market will largely depend on how effective the new stimulus package is, whether consumer confidence is impacted by permanent or additional job losses, and if there is a second wave of COVID.

Finally, a few more important questions remain. What will happen to small landlords impacted by extended eviction moratoriums? What about the two million COVID-19-related forbearance plans that are set to expire soon? And then there is an election to think about. The unknowns are still numerous, and worth keeping an eye on.

Ready to Get Started?

Sell as-is. Pay zero fees to Sundae. Move on your time. No repairs, cleanings, or showings.

Get started

Polina Ryshakov

Polina is Sundae's Sr. Director of Research and Lead Economist. She has more than 15 years of valuation experience across commercial and residential real estate. Her background includes stints with Cushman & Wakefield, Hanley Wood, and Standard & Poor’s. Polina graduated with a double major in Economics and International Relations from the University of California at Davis and has been a CAIA Charter Holder since 2010.