Uncertainty in the national real estate market.

• Author: Coers, Sara

For two years during the pandemic, the housing market was red hot. Then, in 2022, the market appeared to slow down, with the National Association of Realtors (NAR) Pending Home Sales Index--a leading indicator for the housing sector--falling to a low of 75.5 in November 2022, a drop of nearly 27% since March of that year. Things picked up over the winter, but fell again in March 2023 (see Figure 1).

Prices have also been falling, but the median home price in February 2023 is still higher than 2021's median home price (though down almost 13% since the peak in June 2022 as shown in Figure 1).

I am a big fan of roller coasters, but the housing market has had more twists and turns than I can handle lately. With so much uncertainty right now, people are wondering where the housing market is headed. Will we ever return to "normal?" The answer is as much psychological as it is mathematical.

The story of today's housing market has a lot to do with two economic principles--supply and demand (how many houses are for sale and how many people want them) and purchasing power (how much people can buy with the money they have). But the cooling market stems as much from what people think is happening as it does from what is actually happening.

As a real estate appraiser for 15 years and now full-time faculty teaching real estate to college students, I have long been an observer of buyers and sellers in the market. My career has been as much about understanding people's motivations and behaviors as it has been about performing financial calculations.

The supply legacy of the Great Recession

The story of the housing market over the last two years and today's uncertainty has been almost two decades in the making. In late 2005/early 2006, the housing market hit its pre-2021 peak. Prices were high and mortgage lenders had made it easy--many would say too easy--for most people to get a loan. In 2006, the median home price to median household income ratio hit 3.75, the highest number on record at that time, which means people were paying prices nearly four times their income (see Figure 2). The higher this index rises, the more unaffordable home prices become.

In 2006, between steaming hot prices and the easy money available from lenders, the market was too hot. This sounds a lot like 2022, when the median home price to median household income ratio reached 6.46, the highest ever for this metric, as we came off a period of "easy money" due to the lowest interest rates in history. And today, like then, the market clearly reached its boiling point and was forced to cool off.

The obvious reaction to the overheated housing market and changing economic conditions in 2006 was that buyers stopped buying and prices slid downward for the next six years. (1) The other, less obvious, part of how people reacted to the housing crisis was that...