According to an analysis by Nick Gerli, CEO of Reventure Consulting, the US housing market continues to show signs of trouble even as mortgage rates fall.
Despite recent interest rate declines, homebuyer demand remains depressed, with mortgage applications down 57% from their pandemic peak and 43% below pre-pandemic levels.
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The continued weakness in buyer activity has caught many real estate professionals off guard. Industry expectations of a quick recovery in response to falling interest rates have not materialized, reflecting deeper problems in the market that go beyond just borrowing costs.
Gerli said three key factors behind sluggish demand are affordability constraints, buyer exhaustion after the pandemic boom and record high pessimism about the housing market. Recent data from the University of Michigan shows that 87% of consumers believe it is a bad time to buy a home – even more than the early 1980s, when mortgage rates reached 18%.
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Perhaps most concerning is the current home value-to-income ratio, which Gerli estimates is about 4.6, much higher than historical norms. This level has only been approached twice before: during the 2006 housing bubble (4.4) and during the post-World War II boom (nearly 5.0).
Major corrections in housing affordability followed both periods.
“The US has never maintained a housing market that is so expensive relative to people’s incomes,” Gerli said on X, formerly Twitter. “The market is not right and buyers know it.”
Historical precedent points to two primary ways to restore equilibrium: falling house prices or rising incomes. After the 2006 bubble, prices collapsed, causing the ratio to drop to 3.2. In contrast, the postwar era saw gradual improvement thanks to robust income growth, with housing becoming twice as affordable between 1953 and 1973.
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Looking ahead, Gerli expects a possible combination of both factors. Some markets – especially in the Sun Belt, where inventories have risen – may experience faster price corrections. Austin, Texas has already shown how quickly values can adapt under the right conditions. Other regions, especially in the Northeast and Midwest, where supply remains tight, could see an extended period of stagnation.
He said the path to market normalization could take years, requiring a sustained period of falling mortgage rates, price adjustments and wage growth to restore buyer confidence. This timeline contradicts more optimistic industry forecasts, but is consistent with current data indicating continued weakness in fundamental buyer demand – a trend that began in late 2021 when rates were still below 3%.
As the market grapples with imbalances, the possibility of a broader economic recession looms as a potential catalyst for accelerating price corrections, especially in overvalued regions. For now, the housing market remains uncertain, with many potential buyers sidelined by financial constraints and deep skepticism about current market conditions.
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This article Housing Market ‘Out of Confusion,’ Says Reventure CEO: Home Value Still 4.6x Income, Worse Than 2006 Bubble originally appeared on Benzinga.com
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