We are witnessing an unmistakable shift in the US housing market, not a bubble pop like 2008, but a market regime change characterized by buyers retreating as inventory rises and affordability remains strained. Recent data from Redfin shows that roughly 40,000 US home-purchase agreements were canceled in December, representing about 16.3% of homes that went under contract–the highest level for that month since at least 2017.
Excess demand and historically low mortgage rates drove the housing market until around 2023. Trends that cannot continue forever eventually break down when the cyclical structure turns. The peak in housing demand, much like in equities or commodities, eventually lost momentum as mortgage rates climbed and affordability deteriorated.
We also saw a mass exodus out of states like New York and California due to policy, first surrounding COVID restrictions followed by excessive taxation. The political landscape has remained relatively stable on a state-wide basis and both people and corporations have settled in their respective states.
Even as longer-term bond yields and mortgage rates have slightly pulled back, with average 30-year mortgage rates near their lowest point in over three years, they remain elevated compared with the ultra-low era of the early 2020s. Higher rates are pushing monthly payments beyond what buyers are able to afford. Sellers now outnumber buyers by record margins, a dynamic unseen in the recent boom years when over-ask bidding wars were commonplace.
In a boom market, buyers panic, compete, and push prices higher. In a cooling market with more listings, they withdraw when the deal doesn’t meet their financial reality. This is the behavior captured in the cancellation data provided by Redfin. Inspections and contingencies come with a high price tag and can cause buyers to walk away as every aspect of maintaining a home comes with a high price tag.
The problems in 2008 stemmed from systemic financial excess, predatory lending, adjustable-rate resets, and a lack of vetting. It was not an organic situation, but rather, conditions manufactured by credit expansion by financial institutions and rating agencies. We are not witnessing defaults because buyers are choosing to walk away before the purchase. Buyers and lenders are both evaluating risks and stopping deals in their tracks.
Wage growth, while improving, hasn’t kept pace with housing cost inflation over the last decade, especially after the dramatic increases in home prices since 2020. Combined with mortgage rates above long-term averages and elevated property taxes and insurance, the effective cost of homeownership has climbed faster than incomes for many.
Affordability is of particular concern with younger demographics who have been priced out of the market. Starter homes are not what they once were.
The market is recalibrating and corrections are occurring before systemic debt defaults. All participants are making choices based on affordability and the heightened risk of not being able to make payments. It is almost difficult to call this a buyer’s market as no one feels they are walking away with a great deal.
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