By the end of 2022, a significant decline in housing prices and subdued activity hinted at a major downturn in the real estate market. However, throughout this year, the real estate market has shown resilience, with warnings of a recession in the sector failing to materialize.

Compared to the peaks of 2021 and 2022, the current real estate market may indeed be experiencing low activity and price declines, prompting many to warn of an impending recession. However, according to new evidence, the likelihood of a real estate recession seems debatable.

While housing demand has decreased, so has supply. Demand is measured by mortgage application rates, which have remained low for decades. However, the shortage of inventory has led to relatively high housing prices compared to wage levels.

Following the last real estate crisis in 2008, housing prices were around 90 times the average income. By 2022, this figure had increased to 138 times income, deemed unsustainable. However, countries like Canada and New Zealand have even higher housing-to-income ratios.

Despite rapidly rising interest rates, affordability constraints, and a shortage crisis, prices have remained high. Additionally, many high-net-worth individuals remain active in real estate syndicates due to price resets. With over $5 trillion estimated to be on the sidelines due to quantitative easing, preparations for real estate investments are underway.

The past few months of 2023 have shown a reversal of this trend as housing prices rise.

Current State of the Real Estate Market

At the beginning of this year, nearly everyone believed that sluggish economic activity and declining real estate prices signaled a recession in the real estate market. On the contrary, real estate crowdfunding has performed exceptionally well.

However, as the first half of 2023 comes to a close, predictions of an economic downturn have yet to materialize.

There are three main reasons for this:

• Low market activity
• Continued high housing prices
• Low affordability

Market activity in the real estate sector has been low in 2023. Home sales have declined by 18% compared to June 2022 and by 3% compared to May to June 2023.

Two factors have contributed to the current low activity in the real estate market: rising interest rates and low housing inventory.

Rising Interest Rates

According to data from Freddie Mac, the average interest rate for 30-year fixed-rate mortgages was slightly below 7% from June to July 2023, at 6.82%. High interest rates have had a dual impact on both buyers and sellers.

Buyers are hesitant to purchase properties at higher interest rates, while sellers are avoiding applying for new mortgages at much higher rates.

Redfin data shows that currently, 90% of homeowners have mortgage rates below 6%, with 80% below 5%, 60% below 4%, and 20% below 3%. Additionally, single-family rental inventory has increased. Those capable of purchasing another house can use their primary residence as an investment rental to avoid missing out on historically low rates.

Low Housing Inventory

Low housing inventory is nothing new but has reached historic levels in 2023. A recent report estimates a shortage of nearly 4 million housing units in 2023. The imbalance of supply and demand has kept housing prices high.

While prices have declined in many markets, prices have started to rise in certain regions of the country. Sales prices have increased the most in Milwaukee, Miami, Cincinnati, Newark, New Jersey, and Anaheim, California, rising by 2.1% overall compared to last year.

So why do prices remain high? Despite lower activity levels in the real estate market compared to the peaks of 2022, demand for housing remains high.

The combination of limited supply and high demand often leads to bidding wars for homes listed for sale. According to a recent report by the National Association of Realtors, about one-third of buyers paid prices above the initial listing price.

While the real estate market has indeed experienced adjustments since June 2022, prices have been steadily declining. The average selling price of existing homes was $534,700 in June 2022. By October 2022, it had dropped to $489,000, reaching a low of $462,400 in February 2023.

However, since February 2023, prices have started to rise again, with the average selling price reaching $486,300 in March, $503,100 in May, and most recently, $536,100 in June 2023.

Although the possibility of a real estate market recession remains slight, the current state of the market is experiencing an affordability crisis. The latest data from the National Association of Home Builders (NAHB) reveals:

• In 2022, 29% of households could not afford homes valued at $150,000
• Only about 20% of households could afford homes valued between $150,000 and $250,000
• In 2022, 73% of U.S. households could not afford a median-priced new home of $425,786

A new study by the NAHB identifies the impact of price and rate increases on the real estate market:

• A $10,000 increase in median home prices will leave approximately 1.4 million households struggling with housing
• A 25-basis-point increase in the 30-year fixed-rate mortgage rate of 6.25% will squeeze approximately 1.3 million households out of the market

Although prices have declined since the peaks of 2021 and 2022, this trend has reversed, with prices rising again since February 2023.

Currently, housing prices, mortgage rates, and limited housing supply make it extremely difficult for the average American to afford a home.

In the latest Housing Affordability and Supply report from the National Association of Realtors (NAR), households with an annual income of $75,000 (the median household income in the U.S.) can afford homes valued up to $256,000. The problem is that only 23% of listed prices are below $256,000.

The shortage of affordable housing has become more severe in larger states with higher living costs, such as Washington, Florida, and California. These states have large populations immigrating with strong economies. Their per capita construction of homes is also lower, limiting supply.

The likelihood of a real estate market recession remains low. Limited supply and strong demand continue to keep housing prices high. However, the real estate market is facing an affordability and supply crisis. The current supply of homes affordable to ordinary families in the market is limited.