A few weeks ago, we updated our Top 10 Signs of a Market Bubble poster, showing that 8 out of 10 quantitative and 8 out of 10 qualitative signs all point to why the housing bubble is set to pop. We created the poster in 2013 with the help of 73 clients as a way to “check in” on market frothiness each year, and have been identifying an increasing number of signs of a bubble for years. Given the reaction to sharing this with today’s clients, which was even more in agreement than we anticipated, we decided to drill deeper into different market dynamics and refresh where the housing markets stand in today’s backdrop.
From May 2020 to May 2022, home prices increased 1%–2% per month almost everywhere. Demand was unquenchable, supply was low or non-existent, and home builders were recording the strongest margins in history. Rental demand boomed as well. In our monthly Regional Analysis and Forecast report for our research members, we had labeled nearly all the major markets in the Growing or Plateauing phase of their long-term housing cycle.
Housing demand significantly cooled starting in the spring of 2022, first in the markets that are heavily dependent on employment in disruptive tech industry investment, and then nationwide as the negative ripple effects of sharply rising mortgage rates resulted in economic uncertainty, deteriorating consumer sentiment, and a massive reduction in home buyer ability to qualify for a mortgage for the home they wanted.
While all markets have slowed, the dynamics are not the same. We label the major markets in one of three housing cycle stages: Plateauing, Slowing, or Falling. Here is the latest version of a chart we update monthly for our research members, with our criteria for each classification shown at the bottom of this newsletter. Note the heavy concentration of tech markets.
Markets in the Plateauing phase have seen significant capital investment over the past 12–24 months and are now faced with limited volume growth and decelerating home price appreciation, leading to shrinking capital returns, or underwriting becoming extremely aggressive in order for deals to pencil.
- Atlanta, Charlotte, Indianapolis, Orlando, and Tampa experienced significant home price appreciation, in-migration, and job growth during the pandemic (prompted by buyers searching for affordability). Conversely, higher mortgage rates and slower economic growth have caused buyers to drop out of the qualified buyer pool or pause their home search until there is less uncertainty around the economy.
- Miami and New York faced an urban exodus throughout the first 18 months of the pandemic, fueling out-migration and a much slower labor market recovery, but the population has been returning lately. These markets face physical supply constraints, which limits any potential housing market growth.
Markets in the Slowing phase face alarming affordability levels, decelerating (or even declining) home price appreciation, and rapidly slowing sales—making capital investments less attractive. Several of these slowing markets were among the first to recover from the initial COVID panic in April 2020.
- In-migration and job growth, fueled by the proliferation of work-from-home policies, set these markets apart as higher wage workers relocated due to the relative affordability—most notably Dallas, Jacksonville, and Raleigh-Durham.
- Current employment is well above prior peak levels in all of these markets. While strong job growth from high-wage sectors has buoyed these markets, it has also been the primary driver of their now strained affordability, with a significant number of locals now completely priced out of ownership.
- YOY home price growth is decelerating rapidly, and construction volumes are pulling back from very high levels.
Several major markets have now reached the falling phase of the cycle, characterized by flat or declining prices, limited capital investment, and shrinking housing demand.
- Despite being among the largest resale markets in the country, new home construction in Chicago and Minneapolis, whose recoveries lagged in the post-GFC expansion, struggled to take off during the pandemic-fueled housing boom. These economies continue to underperform, and we worry about significant out-migration and sustained population loss.
- Austin, Sacramento, and Salt Lake City, all standouts for in-migration and robust, tech employment demand / job growth throughout the pandemic, have reversed course quickly.
- Phoenix and Riverside-SB have also reversed course quickly, in part due to significant speculative investment that drove prices up quickly. They also benefitted tremendously from the industrial building development boom that has now cooled.
- Sales are dropping and resale supply is skyrocketing, driving home price appreciation down fast, with home values now falling month over month. Single-family construction activity has pulled back, as many builders in these markets are reluctant to open new communities during a downturn.
While the housing market is feeling the impact of higher mortgage rates and increased economic uncertainty, the severity and timing of that impact varies. Our research team tracks these differences by objectively assessing risk/return profiles and can help you make informed decisions. Please reach out with questions on how we can best advise you on your markets.