U.S. housing market is 'chaotic' - and faces one of its biggest tests, Re/Max founder says

MW U.S. housing market is 'chaotic' - and faces one of its biggest tests, Re/Max founder says

By Aarthi Swaminathan

'We will adapt,' Dave Liniger says. 'And hopefully next year, it'll be a much better market.'

It's a tough time for the real-estate industry, which faces a significant test in the form of higher mortgage rates, Dave Liniger, the real-estate tycoon, founder and chairman of Denver-based real-estate giant Re/Max, told MarketWatch in an interview.

The U.S. housing market is "chaotic," as buyers want more homes than are on the market, Liniger said, and mortgage rates are trending higher than they've been over the past decade.

The 30-year mortgage rate averaged 7.1% as of April 18, according to data collected by Freddie Mac. That's the highest level since November 2023. Higher rates equate to higher borrowing costs, which prices some home buyers out of the market.

To be sure, the current, higher-rate environment isn't unprecedented. Rates were far higher "back when [former President Ronald] Reagan was trying to fight inflation," Liniger said, when the 30-year went as high as 17%.

So while the current period is a stressful one, it's not something that the industry can't weather, Liniger stressed.

Since the company was founded 51 years ago, "we've had seven or eight recessions in Re/Max history in the United States, first one was 1973 with the oil embargo. The next one was a few years later in the second oil embargo," Liniger said, followed by the 1980s savings-and-loan crisis, and the Great Recession, which was driven by subprime mortgages melting down.

The current housing recession is much like those periods, he said. "You can't do today's business with yesterday's methods and expect to be in business tomorrow. So we will adapt to this just like anything else," Liniger explained, "and hopefully next year, it'll be a much better market."

An 'unreal market' causing unintentional consequences

Over the past few years, the same mortgage rate that was averaging around 3% to 4% went as low as 2% during the coronavirus pandemic, when the Federal Reserve cut interest rates. "That's an unreal market - it's never happened in the history of our country," Liniger said. "And so what you have is an entire generation of homebuyers who have gotten used to 2.5% to 5%."

That has created an unintentional lock-in effect which has been difficult to shake: With the majority of homeowners in the U.S. now holding a mortgage with a rate less than 6%, there's little incentive for them to move. In fact, 40% of homeowners don't believe they could afford to buy their own home if they were to buy today versus when they bought it five to 10 years ago, according to a survey by Redfin.

The median-priced $420,000 home at a 7.1% mortgage rate would require a monthly housing payment of $2,864, according to the brokerage, which is a record high. The same house with a 4% rate would only have a $2,210 payment.

"Therefore, if traditionally they wanted to move up to a larger home, whatever the reason is, now they look at it and they say 'well, my mortgage is left behind. I can't take it with me. I can't match 2.5%,'" which constrains supply, Liniger said.

Home builders are picking up some of the shortfall in housing units, he said. In March, sales of new-construction homes rose more than expected, due to strong demand from aspiring homeowners, while sales of previously-owned homes fell.

For most of the industry, which has historically relied on resale inventory, with no rate cuts in the near term, "the market you've got is very similar to the market you had last year," Liniger said, when home sales fell to a 23-year low. He expects the market to begin to improve later in the year, or even in 2025.

'Lean inventory of homes' to keep home prices up

While buying a house has become unaffordable for some due to high mortgage rates and prices, don't expect home values to crash anytime soon, experts say.

The housing markets that are currently the weakest are "ones where home prices are the most unaffordable and overvalued," Matthew Walsh, a housing economist at Moody's Analytics, told MarketWatch.

Markets like Austin, Texas, and Boise, Idaho, which saw big run-ups in prices during the pandemic are seeing big drops now, he added. In Austin, home values are down by 4.1% from a year ago, according to Zillow in its March 2024 market report.

At the same time, "extremely low housing affordability and a lean inventory of homes for sale will prevent a meaningful rise in transaction volumes in the coming months, but will support continued national price appreciation in 2024," Walsh said.

Even though some industries have seen an uptick in layoffs, such as in technology, there's so much pent-up demand for homes that "there's no such thing as a foreclosure right now because there are 10 people standing in line to pick a property up," Liniger said.

-Aarthi Swaminathan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 24, 2024 06:00 ET (10:00 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.