Median home sale prices surged from $322,600 in the second quarter of 2020 to $454,900 in the third quarter of 2022, according to data from the Department of Housing and Urban Development. The increased prices over the past two years reflect higher consumer demand spurred by cheap credit, pandemic-era lifestyle changes such as virtual work and migration between states, and stimulus measures from the lockdown-induced recession, according to Federal Reserve Bank of Dallas senior research economist Enrique Martínez-García.
Prices had already been steadily increasing over the past decade as a result of constrained housing supply, while lockdowns introduced logistics bottlenecks and higher labor costs that further restricted the number of available homes, according to the report, which added that soaring home prices produced a “fear of missing out” among buyers and investors who rushed to acquire properties.
“A housing boom — such as the pandemic-era run-up — becomes frothy when the belief becomes widespread that today’s robust price increases will continue unabated … This self-fulfilling mechanism leads to exponential price growth until a price correction inevitably occurs,” Martínez-García said. “Moreover, the latest statistics … closely parallel the preceding housing bubble, with the data once again showing evidence of explosive behavior in the price-to-rent and price-to-income ratios as well.”
A plummet in home prices might complicate efforts from policymakers at the Federal Reserve to cut inflation. Central bankers have increased the target federal funds rate at four consecutive 0.75% increments. “Achieving a soft economic landing … cannot be taken for granted given that further monetary policy tightening can increase the household mortgage debt servicing burden and boost the odds of a severe house price correction,” wrote Martínez-García.
Indeed, actions from the Federal Reserve have caused mortgage rates to witness one of the most significant sustained increases in decades. The 30-year fixed mortgage rate remained below 3% for much of the past two years, according to data from government-backed mortgage company Freddie Mac, before rising to more than 7% earlier this month.
Mortgage rates have, in turn, impacted housing affordability even as evidence of a decline in home prices continues to mount. According to an analysis from real estate brokerage Redfin, monthly mortgage payments on the typical home have surged more than 45% since the same time last year to reach $2,682, implying that the annual salary necessary to afford such a property has increased from $73,668 to $107,281. Four of the five metropolitan areas seeing the greatest cost increases are in the state of Florida, which has also seen the fastest influx of residents from other states over the past two years, while all five of the most expensive cities are in California, which is among the states witnessing the fastest population decline.
Demand among potential homebuyers across the country continues to plummet due to elevated mortgage rates. The Pending Home Sales Index from the National Association of Realtors declined 10.2% in September, exceeding the 3.8% consensus from analysts while pending transactions have fallen year-over-year by 31.0%.