THERE ARE THREE INDICATORS TO LOOK FOR IN DETERMINING WHEN HOME PRICES WILL DROP SHARPLY, BUT ONLY ONE OF THEM IS CURRENTLY PRESENT.
THREE INDICATORS
THE SUPPLY OF AVAILABLE HOMES, CURRENT BUYER DEMAND, AND THE NUMBER OF DISTRESSED HOMES WILL COLLECTIVELY SIGNAL THE NEXT PLUNGE IN HOME VALUES.
Many people argue that housing is due for a correction. Their rationale is that home prices surged at an unprecedented rate from 2020 through the first half of 2022. When mortgage rates jumped from 3.25% in January 2022 to 7.37% nine months later in October, home affordability plummeted to historically low levels. Affordability is based on household incomes, mortgage rates, and home values. Since household incomes have not skyrocketed, and mortgage rates have bounced around 7% for nearly three years, the
natural conclusion is that prices must plunge to improve affordability. Many have exclaimed that they feel it in their “gut,” that it is not a matter of if prices correct, it is when.
Yet, economics does not adhere to intuition or a “gut” reading. Instead, it is best to turn to the facts, data, and current trendlines. There are three key indicators to watch for to determine when home prices will plunge: a glut of homes available for purchase, an elevated number of distressed homes, including both foreclosures and short sales, and weak demand. All three need to be present to instigate a price correction. That is precisely what occurred leading up to and during the Great Recession. According to the Freddie Mac House Price Index, the Los Angeles/Orange County metro area experienced a substantial year-over-year drop in June 2007, 2008, and 2010.
Joy Lee
949.290.4903
joy@heyjoylee.com
DRE# 02102122