Much has been made of an impending real estate recession due to inflation, high interest rates and high house prices.
So how did we get here? Demand increased during the COVID-19 pandemic, creating a real estate bubble. Even before the pandemic, housing stock was reported to be low.
A housing bubble usually begins with an increase in demand for housing, but with limited inventory. With low interest rates and low inventory, it has become a competitive market, causing house prices to rise dramatically. During the summer of 2021, homes were selling at a breakneck pace and home prices were skyrocketing, even creating bidding wars in many areas. However, the market calmed down somewhat in the fall and house prices fell slightly.
Then inflation hit in part due to rising gas prices affected by the Russian-Ukrainian war, which began in February. Even though the United States imports only 8% of its oil from Russia, it is the third largest producer of oil and gas, which affects gas prices around the world. When countries passed sanctions and banned imports of Russian oil, it caused supply problems, leading to higher gas prices. The other part of inflation is increased demand for goods and services. With insufficient supply to meet demand, the price of goods and services increases.
So how does this affect the housing market? As inflation rose, gasoline prices and the cost of food and energy rose. Compared to last year, gas prices are up 44% in 2022 and 104% compared to two years ago. Food costs have increased by almost 11% and energy costs by 20.5% from 2021 to 2022. As inflation increases, interest rates also increase.
Although higher house prices increase the cost of buying a home, interest rates affect the cost three times more. For every 1% increase in interest rates, it has the same impact as a 13% increase in house prices. All of these factors added together made for a perfect storm for many potential buyers, pushing them out of the market.
House prices have risen at a pace that is not keeping up with current wage gains. This affects low to middle income workers the most. For example, a mortgage that cost $1,265 per month last year will now cost $1,924 per month. According to financial experts, when mortgage payments exceed 25% of income, they are considered unaffordable. Housing affordability has seen a double-digit decline this year.
However, there is a light at the end of the tunnel. Gas prices have come down somewhat; interest rates have fallen to around 5% and are expected to reach 4.5% this fall. Many believe that inflation has peaked and is falling. As gasoline prices fall, this will hopefully encourage the construction of more affordable homes and apartments and reduce consumer prices. All of this translates into lower interest rates, which helps to make homes more affordable, which is the bigger goal.
Marlin Palich is President of Stark Trumbull Area Realtors, which serves Trumbull, Stark and Carroll counties.