Real estate goes through cycles — but this one is out of orbit
Some economists say the four-phase housing market cycle has been consistent for decades. But the current market’s “correction” phase isn’t behaving as expected.
Key points:
- The housing market has been stuck in a correction phase for four years. That is largely because home prices haven’t dropped, contrary to a typical cycle.
- The spike in mortgage rates, following a period of ultra-low rates, has suppressed home sales and inventory growth, and homeowners aren’t motivated to sell at a discount.
- While some local markets are in different phases of the real estate cycle, the national trend may not improve until rates drop, or at least stabilize.
The housing market has experienced four years of elevated mortgage rates, low home sales, slowly growing inventory and rising prices. Are those trends part of a normal real estate cycle — and can the market move out of it? Real Estate News spoke with several economists to better understand this persistent mix of conditions.
Before mortgage rates spiked in 2022, the real estate market was following the laws of supply and demand: High buyer interest combined with low housing inventory in much of the country sent prices soaring.
While some rebalancing has occurred in the years since, it's been uneven — Austin's current housing market is much different than Boston's, which is much different than San Francisco's, for example.
"In this recent cycle, there's really no such thing as a national real estate market," said Jake Krimmel, senior economist at Realtor.com.
The phases of the real estate cycle, and how this one diverges
The concept of the real estate cycle dates back 150 years, and some economists argue that it has been a predictable market pattern for even longer. The four phases of the cycle are: Recovery, expansion, hypersupply and recession/correction. Based on the national numbers, the past four years would fall in the correction phase.
But one important characteristic is missing. During that time, there has been only a nominal drop in home prices nationally, although asking prices and inflation-adjusted values have been declining in the past year.
While the four-phase cycle is a useful starting point, the current market is an illustration that reality tends to be messier than an economic model, according to Kara Ng, a senior economist at Zillow.
"Financing conditions throw a wrench into this, for example. High rates after a period of very low rates have caused buyers to hold back and homeowners to sit tight, restricting activity in much of the country," Ng said. "The pandemic-era construction boom also hit unevenly across the country, so conditions are very different depending on where you live."
Even within regions, it's hard to generalize what's happening, according to Krimmel. "All these different places have so many different things going on in their local economies and how much they build and how much they don't —- that is going to dictate whether they follow the quote-unquote national housing cycle," he said.
The market isn't fitting neatly into the cycle, Bright MLS Chief Economist Lisa Sturtevant suggested, because ongoing structural changes are continuing to influence its direction.
"We are still working off the effects of pandemic-era policies and demand and supply drivers," Sturtevant said. "We are in a period of demographic shift," she added, and "it is going to take some time to reset to a new normal."
The lingering impact of those low pandemic rates
The typical drop in nominal home prices during a correction phase was disrupted by a once-in-a-lifetime phenomenon that happened a few years earlier: ultra-low mortgage rates. Not only did pandemic-era buyers get to lock in a 3% interest rate, existing homeowners rushed to refinance, Redfin Chief Economist Daryl Fairweather noted.
"In 2022, mortgage rates increased at their fastest pace on record, which priced out buyers but gave existing homeowners a very good reason to stay put," Fairweather said, adding that today's sellers have a strong incentive to take their homes off the market instead of lowering the price.
As a result, "now we have a low supply of homes for sale and low demand."
Same pattern, opposite end of the mortgage spectrum
The U.S. real estate market experienced this type of stalemate before during a very different, but equally historic mortgage rate era, according to Odeta Kushi, deputy chief economist at First American.
In the early 1980s, the 30-year mortgage rate shot up to more than 18% — the highest level recorded — stomping out demand to buy or sell a home, but not leading to significantly lower prices.
"Today's market has followed a similar pattern. Sales have absorbed much more of the adjustment than prices because demographic demand remains resilient, while the shortage of homes for sale has placed a floor beneath prices," Kushi said.
"Some buyers may be priced out by today's affordability conditions, but existing homeowners generally have significant equity, fixed-rate mortgages, and little incentive or financial pressure to sell."
How do we exit this unusual correction phase?
One of the clearest paths to the recovery phase would be lower mortgage rates, but with inflation still high, that's an unlikely exit route in the short term. Increased new construction might be another way to break out of this phase, perhaps with the help of government incentives, Fairweather suggested.
Rates may not have to fall dramatically for the housing market to improve, according to Kushi, but they do need to stabilize so buyers, sellers and builders can adjust expectations.
"Time, income growth and a more balanced housing market can also support a gradual recovery," Kushi said.
The job market is another key factor in this slow-moving real estate market, Ng noted, since a low-hire, low-fire environment doesn't give rise to some of the life events that spur moves.
"The path of both of those dynamics will play a big role in how quickly we exit this phase," Ng said.